Fed seems to be firing blanks.

Federal Reserve policimakers continued ineptness reflected in these three charts of Libor rates to government short rates in Dollars, Sterling, and Euros. Gavin Finch at Bloomberg writes on the subject:

Dec. 14 (Bloomberg) -- The biggest concerted effort by central banks in six years to restore confidence in global money markets is showing little sign of success.

It may be some time before the banks work through their capital constraints and get back to lending and risk-seeking again.'' William O'Donnell, head of U.S. government-bond strategy in Connecticut at UBS Securities LLC, wrote in a note to clients today. ``The recession risk grows daily.'

The academically oriented Board of Governors at the Fed are addressing technical issues but the current problem has a huge psychological component that they seem incapable of understanding. The Bloomberg article addresses this several times. The Fed must slash the discount rate below market rates and act as the clearing house for interbank loans until mutual trust between the banks is restored. Banks are suffering from the Will Rogers problem: What concerns me is not so much the return on my money as the return of my money. Until the central banks solve the trust issue the problem will worsen. The Libor spreads will signal us if things improve.