I was reading in the New York Times today and I noticed two articles about how the LIBOR rate had dropped significantly yesterday. LIBOR stands for London Inter Bank Offering Rate. Many people have no idea what influence LIBOR has on our economy and the loans we have. LIBOR has an immense impact on our economy. Let me explain why. LIBOR is a worldwide guide to the interest rate banks use to lend to each other. It is usually not far off from the Federal Funds Rate.

As a result of the banking liquidity crisis, banks have become afraid to lend to each other, and so LIBOR has risen independently of the Federal Funds Rate. The Fed is desperately trying to lower LIBOR so banks can get back to lending to each other but it is not working nearly as well as the government would like. Many believe that LIBOR will not get back down to matching the Federal Funds Rate until the financial markets stabilize and who knows how long that will be.

In the New York Times articles today there were two different writers with very different views on the drop LIBOR experienced yesterday. One of the writers believed that confidence among banks is way up after the bailout by the world governments and believes that the banks are slowly starting to feel more and more comfortable lending to each other. We saw Citi and JP Morgan Chase lend money to banks in Europe, which is a big step in the right direction. The other writer saw things differently. He believed that it was just a one-day thing. One day does not start a trend. He believes that things will continue to worsen and that our worst days are not behind us.

The reason LIBOR should matter to everyday people like you and me is simple. Most credit cards and adjustable rate mortgages are based on LIBOR. When LIBOR goes up, our rates also go up. Banks charge us an interest rate by adding LIBOR, the rate they are paying to get the money, plus the margin, the amount that they are making by lending us the money. So the rate we pay on adjustable interest rates are typically

LIBOR+Margin=Interest Rate. So banks are very nervous about lending to each other which is making it very difficult for consumers to obtain credit and when and if they do the rate they have to pay are often times higher than they are used to. There is a liquidity crisis which is causing a lot of the problems we are facing. Banks are having a very difficult time obtaining capital and therefore are unable and unwilling to lend to businesses and consumers. This is one of the main reasons we are currently in a recession.

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