The Wall Street Rescue: How We Will Know If It Worked?

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If the House votes for or against the Wall Street/Main Street bailout/rescue today, the response by the stock exchanges will not be the best measure of the "market" reaction. (See my regulally updated post, "Legislative History on the Fly: The Wall Street Bailout," to follow the current measure itself). Rather, as the key purpose of this massive plan is to increase liquidity in the frozen credit markets, there are some key quantifiable measures to watch:

TED Spread: this is difference between the interest rates on interbank loans and short-term U.S. Treasury bills. (Specifically it is the spread between a 3-month T-Bill and the 3-month LIBOR in Euros (more below)). It is considered a key measure of perceived credit risk because a T-bill is considered risk-free and the 3M LIBOR rate is thought to be the most reliable measure of the market rate between banks. Normally, this spead is around zero. The fact that it has been resting the last few week in the the 3s reflects serious liquidity problems. If it returns to around 1 after the bailout bill, that is a good sign. Bloomberg website tracks it at http://www.bloomberg.com/apps/quote?ticker=.TEDSP:IND .

LIBOR EUR 3M: The three-month LIBOR (London Inter-Bank Offered Rate) is considered the most stable measure of international liquidity. It is upon this rate that loans between banks around the world are based and also underlies many adjustable rates, including ARMs. Check it at this site: http://www.bloomberg.com/apps/quote?ticker=EE0003M%3AIND .

LIBOR USD Overnight: The overnight LIBOR is those most sensitive reflection of liquidity. Lately, it was been a measure of how much the the credit markets are freaking out. After the House vote on Monday, it reached 6.88%--showing that essentially the credit markets were frozen (in a "normal" economic situation, it should be ins the ones and twos). Watch it at http://www.bloomberg.com/apps/quote?ticker=US00O%2FN%3AIND .