While some aspects of the subprime mortgage crisis were predictable, the freezing up the most liquid risk-free markets in the world was not. The illiquidity has been especially striking in the interbank market. The following chart was kindly made available by the Institute of International Finance, an association of international banks and other financial institutions, in Washington, D.C. Their Capital Markets Monitor reports in April: “Credit and equity markets have recovered somewhat, after a series of central banks’ moves to provide liquidity and safeguard systemic stability. However, tension in term interbank markets remains.”

I see three interesting lessons from the chart.

· The most important one, of course, is simply that the spreads shot up so abruptly last August, and that they remain very high. The have come down twice, most sharply in response to central bank measures in December-January, but they have also relapsed twice. It is extraordinary that even large banks are still so uncertain of their environment that they are reluctant to lend to each other. Not a good sign.

· The second interesting point one might glean from the chart is that each of the three times that the spreads have risen sharply over the last year, the spread in the UK has gone up somewhat more than the Euroland spread, with the Fed somewhere in between. One might use these differences to pass invidious judgment on how well the three central banks have handled the crisis.

· The third point, which dominates the second, is that the correlation across countries is very high. The three lines overall move closely together. This means that even though the interbank market has broken down in an important way that we did not think could happen, the banking system internationally is as tightly linked as ever. Contagion is everything. Even though the problem originated in the US (the sub-prime mortgage crisis last summer), you couldn’t prove it by this graph !