Meet the TED Spread

The speaker discusses how the financial crisis will only start to being recovery when the TED Spread comes down to normal levels and banks start lending again.  The TED spread measures the difference between the 3 month treasury bill rates and 3 month eurodollar rate.

The TED spread essentially measures the inherent default risk of loans.  When the TED spread is a high number, bank lending will be lower and a bad sign for the economy.  Conversely, a low TED spread indicates a stronger economic condition and more lending. 

Typically the TED spread is near 1; however, as we saw in the credit crisis, the TED spread went up to a record area at 4%.