How do you tell when banks are lying? Their spreads are moving.

Picture Billy Bob Thornton as Big George and Iggy Pop as Sally in the movie Dead Man.
It’s Iggy’s turn to wear the dress.
Big George: “What's a Philistine?”
Sally: “Well, it's just a real dirty person.”

The LIBOR is the 800 pound Philistine in the room. It's telling us that banks do not trust one another. That's because they're all hiding massive losses on their books through creative accounting processes that would make Walt Disney's Imagineers blush.

The LIBOR rate, or London Interbank Offered Rate, is the interest rate banks charge each other for short-term loans. It’s also the reference interest rate for trillions of dollars of adjustable rate debt. Ever wonder how banks adjust the interest rate on an adjustable rate mortgage? Most use LIBOR. LIBOR’s ridiculously high rate level relative to Treasuries indicates that banks won’t lend to one another because they're not sure such loans would be repaid. When banks don't trust other banks they can't borrow. When banks can’t borrow, they can’t function. This is a double edged sword, since this is very bad for any borrower with an adjustable rate mortgage, most private student loans, or anyone whose loan repayment is tied to an adjustable rate.

Credit markets are the world’s financial circulatory system and the blood has simply ceased flowing. The only lending that’s happening right now is thanks to governments, which means the world’s credit markets are in a coma on life support. They’d already be dead if not for the trillions of dollars in loans provided by governments' central banks.

Since this is a credit market problem, the stock market is not really the indicator we should be watching (even though I can’t take my eyes off the stock market; it’s like a kid who loves playing on a swing set built by Stephen King--on one of his Shining days, not one of his Langoliers days, and starring Jack Nicholson, not Steven Weber).

Search “TED Spread Bloomberg.” That will bring up a chart that compares the LIBOR spread and the Treasuries spread, which has not been this scary since 1973. What we can take from this observation is that the worldwide financial system has a raging fever, and that chart is the thermometer. If the fever doesn’t break, we’re financially screwed. Not screwed… SCREWED.

The biggest conspiracy theorists among us claim that Central Banks might be making LIBOR worse. If that’s true, and the World Banks know it is true, then there’s nothing we can do and nothing we could have done to stop the collapse of the current system into a 'new world order.' I leave you to your own conclusions, and offer the following from naked capitalism:
http://www.nakedcapitalism.com/2008/10/are-central-banks-making-libor-worse.html