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2.7%  Q1 GDP    4.57%  avg. 30-year mortgage     9.5%  Unemployment

LIBOR Drops Most Since March As Credit Thaws

The cost of borrowing money between banks fell to its lowest rate in two months today, a powerful sign that the credit markets are unfreezing.

The LIBOR -- or the London Interbank Offered Rate, the rate at which banks charge each other for loaning money -- today showed the biggest drop since March 19. Which, coincidentally, was about a week after the current stock market rally began.

What does this mean? In October and November, the credit markets were essentially frozen. The economic engine is lubricated by the oil of banks loaning money to each other. Last fall, that stopped, because the banks were unsure their loans would be repaid. Not only did the government and consumers have no faith in banks -- banks had no faith in banks.

This is historically important because it was not the stock market crash of 1929 that made the Great Depression so bad; it was the waves of bank failures that followed.

Now, however, as banks have been bolstered with federal capital and consumer deposits -- because in a recession, consumers save instead of spend -- banks now see one another as healthier. Hence, they are lowering the interest they charge each other on loans. It's just like you: If you have a good credit score, you'll get a lower-interest loan.

The Ticker doesn't want to drown you in esoteric numbers, which is why we've assiduously avoided terms such as "basis points" in this posting.

However, from a comparative point of view, it is worth noting that the LIBOR soared as high as 4.82 percent in October, in the days when former Treasury Secretary Hank Paulson began pleading for $700 billion in government bailout money to prevent the rest of the financial system from following Lehman Brothers into collapse.

Today, banks are quoting LIBOR rates ranging from .7 to .9 percent.

-- Frank Ahrens
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By Frank Ahrens  |  May 18, 2009; 11:06 AM ET
Categories:  The Ticker  | Tags: LIBOR  
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