The spread between 3 month libor and 3 month U.S. treasuries (see graph), a measure of market confidence is going through the roof.
One thing that is sorely absent from markets these days is indeed confidence. It seems that no matter the amount of assurances by government entities, (both verbally and in their actions), an acute degree of skepticism has taken hold of the market place. Although U.S. government bailouts are at record levels and there are signs of a spillover into Europe and Asia, the market (which is always forward looking) is under the impression that the final bill (which won't be known with any degree of certainty for a long time to come) will be significantly greater than the amounts that are being pledged today. This seems logical considering the growing distrust of financial institutions resulting from uncertainty with regards to their true exposure to toxic debt. The price of the opacity has been to exacerbate the crisis for the financial sector by making it more difficult for firms to gain access to funding, as lending has all but dried up. The result of all this is that we are now faced with a situation in which many firms that, under normal circumstances, would be considered healthy, can no longer get the necessary funding to function properly. Government bailouts are therefore likely to continue until the day that at least some confidence is restored. When and how it will occur are the two big unknowns of this conundrum.
