Yikes!

Okay, so this is starting to get a little scary.  What do the government agencies charged with overseeing the economy do when investors all get spooked and start to panic en masse?  For a while the twin attacks of propping up major financial institutions and injecting liquidity seemed to be working, but something spooked the horses again and they are all racing for the stables:

This is the three month treasury bill rate chart.  When there is strong demand for treasuries the price goes up (meaning the rates fall).  Look at what has happened in the last few days.  As treasuries are just about the safest investment available this represents a tremendous "flight to safety" among the major financial actors.  

Another measure of how spooked they are is the TED spread which is essentially the difference between what banks charge each other for loans and these safe investments (3 month treasuries).  Banks charge each other more when they feel the risk has increased and risk increases when other banks become less likely to repay these loans (like Lehman Brothers).  Well here is what happened to the TED spread in the last few days: 

What happens when the newly fluid, integrated and worldwide financial markets get so incredibly spooked all at once?  Nobody knows.  That is why I am getting a little spooked myself.  Still, I remain optimistic that things will stabilize soon (I said that two months ago as well, so...) and slowly the credit market will start functioning more normally.  Why do I say this?  Well remember that flights to safety are good, short-term, cover your arse strategies, but the essential business of banking is lending money to make money.  They can't long survive without getting their capital out there working again.  At least that's the theory. 

Update, I try to avoid cross-posting, the purpose of this blog not being to provide a comprehensive conduit to the entire world of economics news and opinion (Mark Thoma has the lock on this but also does not, apparently, sleep) but this is too good to pass up: over at the Freakonomics Blog at the NY Times, there is a great synopsis of recent events.