L

London

I

Inter

B

Bank

O

Offer

R

Rate

LIBOR!

Sooo… What the **** is LIBOR??

• London Inter Bank Offer Rate – The daily reference rate based on the interest rates at which banks borrow unsecured funds from other banks in the London wholesale money market.

Right..? So what does that actually mean?

• Basically, banks take and lend money. Lots. More than they actually have…

• So… When people want their money from the bank e.g. on payday, the banks sometimes aren’t actually able to give it to them.

• So… they have to borrow some money from other banks who don’t need so much.

• The rate at which this borrowing occurs at is called LIBOR.

And then the credit crunch?

• Kind of self explanatory… there was a drop in the availability of credit.

• If you think about it, LIBOR is at the root of all borrowing, so, it is highly likely that it contributed to the whole scenario…

What happened?

• LIBOR soared! (Because of a collapse in confidence in the banks and their ability to repay the money they borrowed)

• This increased the cost of borrowing for banks and therefore reduced the amount they could afford to borrow.

• This, in turn, reduced the ability of banks to lend to customers and businesses… the money supply was instantly reduced!

Recent LIBOR

Credit Crunch

Sep ‘08

LIBOR

Time

So what was the solution?

Find some more money!

Not like that… Like this…

And that would be..?

• Basically making money, out of nothing…How nice.

• The central bank (BofE) increases the credit in its own account electronically. Thus increasing the money supply enabling, in theory, more money to be lent to commercial banks.

Isn’t that risky?

• Well yes. If the banks still refuse to lend money then there is a chance that hyperinflation could occur. The value of money could potentially dramatically decrease and we’d all be bu**ered… for a while.

REAL LIFE HISTORY

• The credit crunch was caused by LIBOR increasing, for various reasons.

• Quantitative easing was employed.

• Inflation rose, slightly.

• LIBOR fell, banks began lending more, although only slightly.

Quick Test

• What does LIBOR stand for?• What is it?• What is quantitative easing?• What are the risks?

Thanks for watching!By Ben Garner and Tom Maxey

Spalding Grammar School