Off the Charts: Are We Headed for Another Crash?

Commentators have compared the current upheaval in credit markets to the crisis that took place a decade ago, when hedge fund Long-Term Capital Management collapsed after numerous multi-billion-dollar leveraged bets all went wrong at the same time.

Yet, based on the spread between three-month U.S. dollar LIBOR, the rate at which banks offer to lend unsecured funds to each other, and U.S. Treasury bills of the same maturity, conditions are more akin to the chaos that developed around the time of the 1987 stock market crash.

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More ominous, perhaps, is the fact that banks have much less in the way of cheap and relatively immobile customer deposits backing their outstanding loans than in the past. That means they are more dependant than ever on other banks and the financial markets to meet their funding needs.

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With the "TED spread" exploding, all those big-swinging bankers probably wish they had spent a bit more time looking after those lowly depositors.

Comments

[Cash is king:]

The dollar has been overtrading for years and everything is poised to come home to roost. Petrodollars will be recognised as worthless paper, so hard asset trading will become the order of the day. Opec will see to this. It's going to be a rocky ride for the US, Europe and Australia but Russia and China should escape the pain as they are holding large cash reserves. Get into Euro's, Swiss francs and the YEN to safeguard your assets.

2007 Dec 04 01:33 PM