How High Is Financial Risk Today?

The market's fear is reflected in the TED spread, a cute, cuddly name given to the difference in interest rates between inter-bank loans (LIBOR) and U.S. treasury bills. We use 3 month maturities on both to keep things apples-to-apples. The spread has shot up during the financial crisis, but I wanted to put this into some perspective:

Yes, this is a crisis. About as bad as September 1987 when the stock market crashed, but not nearly as bad as the recessions of the early 1980s, or mid 1970s, or 1970.

What I see in this chart is the Great Moderation, the milder business cycle climate that I discussed in two interviews with Mark Thoma.

So, take heart if you survived any of those past recessions. You'll likely survive this one, too.

Comments

[Smarty_Pants:]

Alan Greenspan pointed out the underlying conditions of the credit crisis in 1987. They were nowhere near as bad as they are today. The debt levels are far higher, more leveraged, and more widespread than they were back then.

Recall that the 1987 market plunge required very little FED intervention, not the repeated, expanded, day-after-day actions we see today. Don't be surprised if this downturn is much worse than the one in 1987.

"The Great Moderation" managed to push all the small problems into the future and we are having to deal with them all at once now. Financial risk is very high indeed. By any measure.

2008 Oct 09 04:30 PM

[morosem:]

uh.. hello? TED spread as of 10/9/2008 is like 423 bps. How do you arrive at your conclusion of current crisis is less severe than the early 1980s, or mid 1970s, or 1970?

2008 Oct 09 07:07 PM

[whidbey:]

Not too impressive, really. We expect to survive this market, but we had in mind not being too deranged by the process. As for "this is not as bad as" crap. Keep it to yourself since it is nonsense. It is all relative to how the individual investor situation was at the turn of fate.

You seem to have beaten most of us in becoming slightly drafty and drifty about how the world works. Spare us the grand gestures !

2008 Oct 09 08:46 PM