Justin Fox on Arthur Laffer and Company
links for 2007-12-09

Stay Awake. For Ye Know Not When Financial Apocalypse Cometh

Paul Krugman sends us to WSJ Marketbeat for this graph:

The “TED spread,” or spread between three-month Treasury bills and three-month Eurodollar futures. (Source: Lehman Brothers)

20071208_delong_micro.jpg If you think that a collapse of a major bank borrowing short-term in Eurodollars would ultimately mean a 20% haircut for the Eurodollar lender, and are willing to assume risk neutrality, then if I can still do arithmetic this graph tells you that the odds that any given major bank borrowing Eurodollars will collapse tomorrow have gone just from 0.00009% last July to 0.00056% today--from something that you expect to happen once every 1,000,000 days or 3000 years to something you expect to happen once every 200,000 days or once every 500 years.

It's a lot more complicated than that, but those are the rough orders of magnitude...