First, the TED spread (definition here, worth your time if you are unfamiliar), a traditional measure of banking stress, hit another recent high today at 3.62 and closed the day at 3.61 – pretty much right at the high of the day.

A second measure of the reluctance of banks to lend to each other is the "Swap Spread," which hit a record today.  Not a ‘recent record,’ but a record.

[quote]Oct. 2 (Bloomberg) — The spread between the rate on a two-
year interest-rate swap and surged to a record
as money-market rates climbed and concern increased about the
success of a proposed U.S. financial-rescue package. [/quote]

Together these measures tell us that banks are not lending to each other.  They don’t trust each other.  When banks don’t trust banks it is not a big stretch to conclude that they don’t trust anybody else either.  This is a direct measure that the credit markets are in complete disarray.

A third measure is the London Interbank Offered Rate or LIBOR, which hit the second highest rate of the year today at 4.21%.

As reported today in CFO magazine:

[quote]The recent rise in Libor rates is a dire warning to borrowers that
interest rates won’t be dropping any time soon, according to a report
issued by Merrill Lynch.

Libor is the benchmark interest rate banks charge each other for short-term loans. The rate is based on what the world’s most creditworthy banks charge each other, so it is a starting point for the interest rates lenders charge less creditworthy borrowers — such as corporations. The rise in Libor is worrisome, emphasizes Merrill, because the rate is used to set the terms for numerous financial transactions.[/quote]

I recently wrote that September 19 would be remembered as the day that the markets changed forever.  We are only now finding out why the extraordinary steps of that week were taken:

[quote]The credit crisis has played out in places most people cannot see.
It is banks refusing to lend to other banks – even though that is one
of the most essential functions of the banking system. It is a loss of
confidence in seemingly healthy institutions like Morgan Stanley and
Goldman – both of which reported profits, even as the pressure was
mounting. It is panicked hedge funds pulling out cash.

It is frightened big investors protecting themselves by buying
credit default swaps – a financial insurance policy against potential
bankruptcy – at prices 30 times what they normally would pay.

It was this 36-hour period two weeks ago – from the morning of Sept.
17 in New York and Washington, to the afternoon of Sept. 18 – that
spooked policy makers by opening fissures in the worldwide
financial system.

In their rush to do something, and do it fast, the Federal Reserve
chairman, Ben Bernanke, and the Treasury secretary, Henry Paulson Jr.,
concluded that the time had come to use the "break-the-glass" rescue
plan they had been developing.[/quote]

In short, most of the direct market action that you and I can observe from out here in the cheap seats is only minimally telling the tale of just how profound this crisis really is.

$700 billion?  A meaningless amount, concocted in a moment of fear, that almost certainly has no bearing on the final amounts, whatever they may be.

Take care and be nimble. Things are shifting rapidly.

A very nice analogy, found here:

[quote]Analogies are never perfect, but here’s one using horse racing. Don’t expect a perfect correspondence to the banking situation, but I think it is close enough for government work.

Joe goes to the track and bets $2 on a horse.

Two guys standing nearby get into a discussion and Fred says to Sam, "I’ll bet you $5 that Joe wins his bet."

Next to them are Bill and Bob. Bill says: "I’ll bet you $10 that Fred welshes on his bet if he loses."

Next to them is Sally. Sally says: "For $3 I’ll guarantee to Bill that if Bob fails to pay off, I’ll make good on the bet."

Sally then goes to Mary and borrows the $7 needed in case she has to ever pay off and promises to pay back $8. She doesn’t expect to ever have to pay since she believes Bob will always make good. So she expects to net $2 no matter what happens to Joe.

A quick calculation indicates that there is now 2+5+10+3+7 = $27 riding on the outcome of the horse race.

Question how much has been "invested" in the horse race?

Answer:

$50,000 by the owner of the horse who is expecting to recoup his investment from the winnings of the horse and other future deals. Everyone else is gambling, not investing.

The issue with the home market is that the only "investor" was the person who bought the home. All those engaged in the meaningless derivatives spun off from this are gambling. You can see how quickly the face value of all these side bets can exceed the underlying investment. Who is holding these side bets?  Not the homeowner. It is the people at the failing investment banks, hedge funds and similar enterprises. Notice that the bailout is being directed at them not the homeowners.

The real world is, of course, even more complicated. Over the last 30 years people have been allowed to place bets on everything starting with the value of stock averages. They might as well bet on the temperature in Newark at 8:00 AM.

So when you hear everybody saying this is a crisis caused by the housing collapse, be skeptical. We are in the midst of a classic pyramid or Ponzi scheme and there is no way out except for people to lose a lot of money. All that is different this time is that it is the taxpayers who are being asked for the cash. [/quote]

The national debt, which stood at just $5.73 trillion when Bush took office in January of 2001, is now more than $10 trillion.

This is a stunning 75% increase just since the day Bush became the first President ever to forgo the traditional walk to the podium, preferring to ride in his armored car (perhaps the object-throwing crowds had something to do with that).

Think about this increase for a minute.

By the time Bush leaves, it could easily amount to a perfect doubling of the national debt in the span of only eight years.

To those who now want to rescue the credit markets so we can "get back to how things were" are failing to observe that "how things were" was, most recently, not at all how things used to be.

There’s nothing to return to.  A nation that doubles its debts every eight years does not really exist.  It is an illusion built on borrowing. There’s no way to "get back to that," because it was just a crazy party, thrown at great expense. But now the rugs are stained, the lamps are broken, and booze is all gone.

Here’s what it looks like from a historical view.  Bush’s legacy (which is really the legacy of everybody in DC; I do not mean to pick on him alone) is circled in a color I like to call "rug stain yellow."

All of these wild attempts to "stabilize the markets" with a big government borrowing binge are most certainly destined to be ill-fated.

The only realistic way out of this, from a banking system and government standpoint, is to print, print, print.

There is almost no doubt left in my mind that the printing process is either already humming along in the background, or soon to begin.

Oh, by the way?  My mother-in-law reports that today that she went to take cash out of the bank, but greeting her at the door was a hand-taped sign stating that customers are now limited to $1000 cash per day.

Gold and silver were hit again today in the lightly traded access (paper) markets, but good luck finding any physical to buy. It’s not impossible, by any stretch, but it’s a lot harder than it was last week, and that was harder than last month.  The trend tells the tale.

Congratulations, America, you are now officially a $10 trillion debtor nation. Break out the party hats.

Here’s one example from the gas shortages plaguing the Southeast:

From the Wall Street Journal: