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A Determinedly Optimistic Post About the TED--Spread


I tend to think posts about the TED spread are better when they don't spend too much time trying to explain the TED spread. Suffice to say that a higher TED spread means more economic chaos: It essentially tracks the market's prediction that major banks will default on their loans to one another. Last October, everyone freaked out when the TED spread jumped from its normal 30 to 50 basis points and hit 459 basis points. When you heard typically sober economists talk about canned food and armed vigilantes, they were generally making predictions off of the TED spread.

Then things calmed down and the TED spread fell back into relative obscurity. Jeffrey Korzenik, a veteran TED-watcher, explains why:

The TED spread has now returned to about 50 basis points, levels I would associate with the “normalcy” that preceded the Panic of 2008. There was always a question as to whether the TED would return to such low levels or would forever reflect some kind of unforeseen-event-risk (the “fat tail” of the probability curve that’s been much discussed in the trade). Cynics might argue that the TED returning to such low levels shows that market participants have learned nothing from the financial system’s upheaval. I prefer to see this as a recognition that the U.S. government does have the will and power to prevent a systemic meltdown

That's a cheery analysis for a Monday morning, right? So that's the part I'll quote. But those who've had enough coffee to read sentences like "given the inflationary forces that the monetary and fiscal stimulus may unleash, I can easily envision a scenario where the TED widens on the back of Fed tightening," should check out the end of Korzenik's post.

(Graph credit: Korzenik)

By Ezra Klein  |  June 1, 2009; 10:30 AM ET
Categories:  Financial Crisis  
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But does the US government have the will to raise taxes or cut spending enough to pay for it? The spread between the 2 and 10 yr T-Bills is starting to say no.

Posted by: staticvars | June 1, 2009 11:31 PM | Report abuse

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