Investors and policy makers are looking at new ways to monitor the financial crisis. After Lehman failed last September, there were clear metrics. For example, the spread between LIBO and the Overnight Index Swaps (OIS) and the spread between T-bills and LIBOR (TED spread) were widely used. While these metrics, popular thermometers for gauging the patient’s fever, have cooled somewhat, they still remain elevated. The TED spread for example peaked on October 10th near 464 basis points and has been flirting with the 100 basis point level most of this month. Prior to the crisis, the TED spread would typically average between 20 and 40 basis points.
Moreover, part of the improvement has been a function of government or central bank fiat. Yet as was already widely appreciated, easing a patient’s fever is not the same as curing the illness. We need to compliment our current tools with new metrics and that is the purpose of this note.