In a replay of the last four months of 2007, interest-rate derivatives imply that banks are becoming more hesitant to lend on speculation credit losses will increase as the global economic slowdown deepens.
The premium banks charge for lending short-term cash may approach the record levels set last year, based on trading in the forward markets, where financial instruments are sold for future delivery. Back then, concern about the health of the banking system led investors to shun all but the safest government debt, sparking the biggest end-of-year rally for Treasuries since 2000.
Now we have the same issue, in part because of bank health (and fear that the worst may be yet to come), in part because of some non-subprime defaults and in part because of fears -- founded or not -- of where the economy is going.
Is it just me, or does this look like a vicious cycle to you?