What Are the Indicators of the Financial Crisis?

It would be nice to have a concrete way to know if the financial crisis is getting better or worse. Or course the indicators would probably include the housing market, asset-backed securities, commercial paper, interest rates, GDPs, and the availability of credit.

I couldn’t come up with a complete picture, but here’s what’s out there as of today,

1. Banks are lending. According to Jon Hilsenrath at The Wall Street Journal,

Banks actually are lending at record levels. Their commercial and industrial loans, at $1.6 trillion in early November, were up 15% from a year earlier and grew at a 25% annual rate during the past three months, according to weekly Federal Reserve data. Home-equity loans, at $578 billion, were up 21% from a year ago and grew at a 48% annual rate in three months.

2. Bank depost interest rates are going. Up as a result of the demand for bank loans, banks are waging a rate war for deposits. This could be good news for small investors or other people with cash.

3. Home inventories are decreasing. This is one of the big indicators of how the economy is doing: whether home prices continue to fall or have reached a low point and are going up. Lately, I have seen both anecdotal evidence (some of my relatives bought first homes) and some other articles (one about increased buying in central California) suggesting that buying is beginning to happen. However, as the referenced article points out, the backlog is still huge. So prices may not move yet.

4. Some key interest rates have returned to their pre-crisis state. In particular, the 3-month LIBOR that had risen sharply to 4.7% or so has fallen back to the range of 2.8 to 3.1%. Similarly, commercial paper rates for top-tier corporations have fallen below their pre-crisis levels. So the Federal Reserves’ actions in that market appear to have thawed the ice for now.

According to David Goldman at CNN Money,

The credit environment has been slowly improving. Borrowing rates are retreating from historical highs, the commercial paper market is expanding and market gauges are showing a return of confidence.

5. Central banks around the world have lowered interest rates. This should make credit easier for at least somebody.

6. Money is flowing back into money markets. One of the precipitating factors of the great panic was when the Reserve Primary Fund “broke the buck.” The outflow of money from the money market funds that are critical to financing business operations threatened to bring the economy to a halt. While the net inflow helps, it doesn’t mean all their problems are solved.

7. Alan Greenspan says the best indicator is the LIBOR-OIS spread. Again from CNN Money,

Alan Greenspan, the former Fed chief, has said that we will know the credit markets have returned to normal when the Libor-OIS spread returns to just a hair above the anticipated Fed funds rate. That will show that banks are confident about the market conditions and have resumed normal lending practices. Libor-OIS was less than 0.8 percentage points before Lehman collapsed. It reached a record high of 3.64 on Oct. 10, and sits at 1.74 today. So according to Greenspan, we’re only about half-way to recovery.

The good news for the little investor is that it could be argued that many investments are now cheap. See the article. But you’ll have to make your own call on whether to “buy” it.

Leave a Comment