Understanding How Banks Lend to Banks (and thus the Credit Crisis) - Plus, Could Congress Save Christmas?

When you read that there is a credit crisis, you are probably thinking that means you can't get a mortgage. You're half right. What that means is that the banks are unwilling to lend to each other because they are not sure who is going to fall next. THAT's what is behind the rescue legislation passed by Congress and signed by President Bush. BUT, you're still half right, because when banks won't lend to each other they certainly aren't going to lend to small businesses or you - the home owner. It gets a bit more complicated and you've probably seen terms like LIBOR (which we've posted an explanation on before) and TED being used in articles that are normally deep in the business pages, but now finding themselves on the front page, every day.

Here's why you care: LIBOR is the term for the rate at which banks lend to each other overnight. Because the amount of money is so large, overnight rates, short term rates, longer term rates are all different in order for the lending bank to make money based on the perceived risk of the loan. CNNMoney.com has a terrific explanation as to how all of this works, and why there is a bit of good news in here. Reading this piece will make you smarter and feel less at sea.

Meanwhile, could Congress save Christmas? It looks like what we've been hearing is now making its way to the New York Times - that there's a good chance for a second stimulus package. In other words, Congress may send you - the taxpayer - more money. The question is in what form. The New York Times has a terrific write on this.

Here's why you care: Get ahead of the curve and read this story because when Congress comes back the fight will be in what form, rebates, tax cuts, etc. And, as always, what else will go into the bill to convince lawmakers sitting on the fence about it.