Banks don’t trust banks.

The TED spread—the difference between the interest rate on 3-month US Treasuries and what banks charge each other for 3-month loans—is at stratospheric levels. The conventional wisdom is that the spread is high now because banks perceive a high risk of not being repaid. In normal times, the TED spread is about 0.5 percentage point. Today, it rose to 2.76 points from just over 2 points yesterday. It hasn't been over 2.5 since 1987 (just before the stock market crashed in the fall). If banks are this worried about the financial mess, why should I be calm?

Update on Wednesday, September 17, 2008 at 05:49PM by Skeptic

T-bills have been bid down to 0.06% interest.  When I looked earlier today LIBOR was 3.01, making the TED spread 2.95 points.  And let's notice that when "real" (inflation-adjusted) interest rates go negative, as they apparently have, the Fed can't do much to stimulate the economy with further interest rate reductions.  That is the "liquidity trap" that plagued Japan for more than a decade starting in 1989. Added 9/22/08:  Paul Krugman has a good description of the "liquidity trap" here.