1. Why Should You Care About LIBOR?
Overnight the three-month dollar LIBOR rose 4 basis points to 4.95% today, the biggest one-day increase since Sept. 3, according to the British Bankers' Association. But what is LIBOR, and why should you care?
* LIBOR is the London Interbank Offered Rate for dollars.
* Simply put, it's the amount banks charge each other for loans.
* Ok, so why do we in the U.S. care about the London Interbank Offered Rate?
* A number of important reasons.
1) LIBOR is the most active interest rate market in the world.
2) It is the reference rate for many financial derivatives.
3) It is an important benchmark for determining "real" supply and demand for credit.
* Another way of viewing LIBOR is to consider it as a "real" indicator of supply and demand.
* Why "real"?
* Because LIBOR, which generally trades only a hair of a percentage point (we're talking a few hundredths) above the Federal Funds rate [a.k.a. the TED Spread - sic], is the overnight lending rate among banks set outside the U.S. Federal Reserve's control.
* The Federal Reserve has many tools at its disposal to set the Federal Funds rate, the overnight rate charged by banks, but has no control over LIBOR.
* The fact that LIBOR is high and rapidly rising is an indication that either demand for dollars by large banks is high, or supply is low.
* In this case, demand is high because banks are both hoarding cash to ensure they have adequate reserves, fearful of more writedowns [a.k.a. losses on mortgage paper and derivatives - sic], and supply is low because they are afraid to lend the money to other banks, fearful they won't be repaid.
* That's why LIBOR matters to you.



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