The yield spread between 3-month LIBOR and the fed funds rate is at its widest since 1987, reflecting continued funding strains in the inter-bank market and anxieties over the U.S. financial system in general. It is not surprising to see anxieties as high as they are given the magnitude of the current crisis, the history of reactions to previous crises, and plain old human behavior.
Concerns over whether Washington will pass the Treasury Department's proposal for purchasing up to $700 billion of distressed assets is the excuse given by most for the renewed strains in the financial markets, although it is difficult to fathom that investors truly believe Congress will fail to pass a bill this week. This means that the true driver of the continued strain in the money markets was last week's harrowing events and the impact it had on the psyche in the U.S. and around the world. Frayed nerves will eventually calm, as with past crises. (See more spread discussion in the video)