Last week's stock market blowout added more than 4 per cent to the Dow Jones Industrials, but it had no affect on Libor rates. The so-called “Libor rate” rose steadily from Tuesday through Friday signaling more troubles in the banking system. Libor, which means London Interbank-Offered Rate, is the rate that banks charge each other for loans. It has a dramatic effect on nearly every area of investment. When the rate soars, as it did last week, it means that the banks are either too weak financially to lend to each other or too worried about the ability of the other bank to repay them back. Either way, it puts a crimp in lending. Banks serve as the transmission point for credit to the broader economy via business and consumer loans. When they're bogged down by their own bad investments or when risks increase, rates go up and the whole process slows to a crawl. When banks are unable to extend credit freely, business activity decreases and GDP shrinks.
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