Generations of Americans have been trained to follow the Dow Jones Industrial Average for a quick snapshot of how the economy is performing or is expected to perform. There’s a lot that’s ill-advised about that habit, but, most importantly, attending to the ups and downs in the Dow won’t tell you much about the current financial crisis. Ours is a crisis of credit: Financial firms are unwilling to lend to each other (at all-but-exorbitant rates) for fear that borrowing firms may fail or that they themselves may need the cash to fend off their own crisis.
Whereas the hourly fortunes of the Dow or any stock index are, at best, indirect reflections of this reluctance to lend, the TED Spread measures credit conditions directly. Bloomberg tracks the TED Spread here. What sounds like second-rate Nutella is actually the difference between the interest rate banks charge each other on three-month loans and the interest rate on three-month U.S. Treasury bills.
Why TED? The T comes from “T-bill,” shorthand for short-term Treasury bills, and the ED comes from “eurodollar contracts.” . . .
T-bills are the safest investment. Loaning between banks is riskier. The difference between the interest rates (the TED Spread) shows the perception of the risk. Historically the TED is around 0.5. Right now it’s at 4.23.