LIBOR Becomes a Bit More Accurate, So Financial Crisis Becomes a Bit Worse

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Interbank borrowing rates updated to include mid-April restoration of LIBOR accuracy
[Source: Institute of International Finance, Washington, DC]

Continuing on the theme of the unusual spread that banks currently have to pay to borrow from each other since August (due to credit risk and liquidity concerns): a Wall Street Journal article on April 16, the day after my last post, explained that LIBOR had recently lost some of its reliability. The true spreads were even higher than what the panels of banks were reporting to the institution that calculates LIBOR, the British Bankers Association (BBA). Banks can have an incentive to act strategically in the interest rates that they report to the BBA. Even though the highest and lowest respondents are dropped from the computation, that was not enough of a correction. But the Wall Street Journal reported the next day that the banks had immediately reacted to this news by increasing the honesty of their interest rate numbers. The updated version of the LIBOR graph exhibits an upturn in the US interbank rate at the very end. read more

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Graph of Interbank Spreads Suggests Financial Crisis Continues Unabated

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While some aspects of the subprime mortgage crisis were predictable, the freezing up the most liquid risk-free markets in the world was not. The illiquidity has been especially striking in the interbank market. The following chart was kindly made available by the Institute of International Finance, an association of international banks and other financial institutions, in Washington, D.C. Their Capital Markets Monitor reports in April: “Credit and equity markets have recovered somewhat, after a series of central banks’ moves to provide liquidity and safeguard systemic stability. However, tension in term interbank markets remains.” read more

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More quotes from Bush White House affirming the Laffer Hypothesis

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In my earlier post, I catalogued some quotes from high Bush Administration officials asserting the Laffer claim that a cut in US tax rates stimulates income so much that the Treasury ends up taking in more revenue than before. I didn’t then quote in detail the extensive statements made by the Director of Office of Management and Budget, Joshua Bolten, in July 2005.

Director Bolton’s statements are of particular interest for several reasons. First, by 2005 it had become obvious to any objective observer that (1) the record budget surplus inherited by the Bush Administration had been quickly converted into a record budget deficit, and that (2) the aggressive Bush tax cuts were a major cause of that swing (as was the sharp acceleration in federal spending, both domestic and international, relative to the 1990s). Second, while the utterings of President Bush himself can in general perhaps be dismissed as not to be taken seriously, Bolten was the professional whose job is to be responsible for the integrity of the budget process. (Indeed, he is a higher-quality civil servant than some in the Bush Administration who have been quick to “bolt on” crazy ideological propositions to what should be serious positions.) read more

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