The TED Spread and thawing credit markets

In an earlier post I wrote about the TED spread as an indicator of problems in the credit markets. The TED spread measures the difference between LIBOR which is the rate that banks pay when they take a three month loan and the yield on a three month treasury bill. Because interest rates are an indicator of risk, the large spread in the numbers revealed an increase in percieved risk in bank lending. Bloomberg reports today that the TED spread is narrowing, meaning that credit markets are beginning to return to normal. Check out the current chart here. As the cost of bank lending recedes, the volume of loans should also return to near normal levels. An important point to realize is that this crisis was caused by too much lending, so we should not want the volume of loans to return to pre-crisis levels.