Interbank lending rates spike
As the markets work to sort themselves out in the wake of the bailout plan's demise, the rates banks charge each other to borrow have risen to an all-time high. Marketplace Senior Business Correspondent Bob Moon reports.
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TEXT OF STORY
Kai Ryssdal: But first, stock markets bounced back handsomely from yesterday's drubbing, but there are still some problems lingering under the hood. The dilemma is one that's familiar to a lot of us: When you're having trouble scraping by, the more it costs to borrow money.
Today even the world's biggest banks were coping with that problem. Our senior business correspondent Bob Moon explains that the credit markets are sputtering like never before.
Bob Moon: Let's carry on with that analogy, Kai. If the free flow of credit fuels the world's economic engine, you could think of something called LIBOR as lubrication. LIBOR is short for London Interbank Offered Rate. And the LIBOR gauge on the flow of money from bank to bank around the world was signaling big trouble.
Kim Rupert: The higher it gets, the more fearful and more distrusting it implies in the market.
Action Economics analyst Kim Rupert watched nervously today as the LIBOR gauge soared higher than it's ever been, almost three times higher than yesterday. At Merk Investments, portfolio manager Axel Merk fears we'll all be caught in the fallout.
Axel Merk: If the cost of borrowing for the banks skyrockets, then it is not possible for them, at least not in the medium or long term, to give you a loan at a reasonable rate. They have to pass that higher borrowing cost on to you.
Merk says the effects will soon begin to hit everyone from farmers who need a loan money to buy seed to small businesses who need to make the payroll. Donald Straszheim is vice chairman of Roth Capital Partners. He warns that Congress needs to race the clock.
Donald Straszheim: It shouldn't take too long, days or weeks not months, before there is real damage done. If companies can't get the financing to buy inventory to put on their shelves to sell, that shuts the company down in a hurry.
And, forces widespread job losses. Already, businesses across the country are complaining of higher borrowing costs and the sudden loss of credit lines. One other possible effect: The fine print in a lot of adjustable-rate mortgages uses the LIBOR benchmark. At PNC financial, economist Robert Dye hopes that doesn't push house payments even higher.
Robert Dye: We'll have to keep our fingers crossed and look back at this hopefully as a short-term blip that will not affect mortgage-rate resets.
Dye says that could all depend on what Congress does next.
I'm Bob Moon for Marketplace.
Comments
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From Portage, MI, 10/01/2008
I too was suprised that the rate was not included in the story. Also it would have help the lisener understadn better what the historical rate has been. I find that 7% is not outragous rate, might be high, but the risk is high.
From Long Beach, CA, 09/30/2008
How about participating in responsible journalism and actually saying what the LIBOR rate was and what the rate became? Guess what, if banks have shown that they are not responsible with money, I think prudent advise from an investor would be to raise the interest rate to an astronomical rate of close to 7 %. Thanks for not completing the story or being impartial. I will now always question a program I used to think worthy of listening to at home for advise.
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