OK, This One is Really Bad News if True

OK, for a while now, I have been talking about how the increasing TED and other spreads indicate that the credit market has not unfrozen.

It now appears that at least one of these numbers, the LIBOR, the London inter-bank offered rate, may actually have been significantly understated, meaning that the spread is higher, which means that people are more timid about lending money than has been previously reported (H/t Paul Krugman)

There are now indications that some banks may be under-reporting both the interest rates on the loans that they are paying, because it would be seen as financial weakness, which might lead to downgrades, and possibly a run on the institution.

Questions about Libor were raised as far back as November, at a Bank of England meeting in which United Kingdom banks, the firms that process bank trades and central bank officials discussed the recent financial turmoil. According to minutes of the meeting, "several group members thought that Libor fixings had been lower than actual traded interbank rates through the period of stress." In a recent report, two economists at the Bank for International Settlements, a sort of central bank for central bankers, also expressed concerns that banks might report inaccurate rate quotes.

It's of interest to more than the markets. LIBOR is also what many adjustable rate mortgages use as a benchmark to set their rates.

The financial system really does seem on the verge of collapse. We are getting to the point where there is absolutely no reliable data upon which one can make a decision, whether it is an individual investor, or the Federal Reserve.