It’s helpful to remember that ours is a market economy. That means that economic decisions aren’t forced from the top by a government bureaucrat, but rather the reasoned (or sometimes emotional) decisions of millions of individual consumers, business executives, bankers, marketers etc. Reports from a number of sources today hint that even with the push of substantial capital into the marketplace, many businesses are reluctant to borrow, and many lenders are still hesitant to lend. With uncertainty in the real estate market throwing valuations and appraisals off kilter, its hard for lenders and borrowers to strike a deal. General economic uncertainty and the spector of unemployment or business declins, brings into question the ongoing financial stability of potential borrowers.
All in all a situation that needs to unwind through the decisions of millions not just a handful in Washington, Wall street or London.
Here’s what CNNMoney has to say about it.
NEW YORK (CNNMoney.com) — Lending rates fell again Friday, but as the cost of borrowing eases, some government data suggest private lending is not expanding.
The 3-month Libor rate dropped to 2.29% from 2.39% on Thursday, according to Dow Jones, marking the rate’s lowest point since Nov. 12, 2004.
The overnight Libor rate held steady at 0.33%, according to Bloomberg.com. The overnight rate is just a hundredth of a percentage point above the all-time low.
About a month ago, 3-month Libor was at 4.82%, and the overnight rate was at an all-time high of 6.88%. Lower rates are a major boost for the strangled credit markets because more than $350 trillion in assets are tied to Libor.
A number of U.S. government programs aimed at easing funding concerns for banks and encouraging lending between financial institutions have also helped lower Libor rates. Such initiatives include lowering interest rates, injecting capital into banks and providing insurance on all non-interest bearing accounts.
Falling Libor rates are “a very important ingredient” in the recipe for economic recovery, said Michael Strauss, chief economist at financial research firm Commonfund.
“Improvement in the Libor market is an important first step towards getting banks to act like banks again,” Strauss said.
As financial institutions become more confident in lending to each other, they will become more willing to lend to businesses and consumers, according to Strauss.
But with the economy likely in a recession, some indications show the Federal Reserve’s programs and lower rates have not yet encouraged banks and free market investors to lend to businesses.
The Fed announced Thursday that it lent another $100 billion to companies over the past week through a new short-term funding program. In its so-called Commercial Paper Funding Facility, the Fed has provided critical short-term financing to businesses and financial institutions in desperate need of cash.
But in a separate report, Fed data showed the market for commercial paper expanded by just $50.5 billion. Even as the Fed’s program has dragged down borrowing rates, the difference of $49.5 billion between the Fed’s injection and the market’s growth suggests that the commercial paper market would have contracted without the Fed’s involvement.
One-year adjustable rate mortgages, or ARMs, fell in the week to an average of 5.25 percent from 5.38 percent last week.