The danger comes because when money stops flowing the subsequent seizure in money and credit markets drains confidence rapidly. All too quickly a downward spiral in liquidity can emerge.
In the summer the Federal Reserve provided positive momentum by cutting rates, but that proved to be a short-lived rally. The TED spread – the difference between Libor and treasury bills – is widening again. This measure of investors’ risk aversion is not quite back to the 225 basis points seen in August, but at 160bp is substantially higher than the level it fell to during October of 100bp and way above the 40bp that applied before the credit crunch.
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