Bank Lending Measure Worsens

The Libor-OIS spread, a measure of how willing banks are to lend to each other, rose sharply this morning after the historic events of this past weekend.

Still, the spread is below its peak last December, right before the Federal Reserve introduced the Term Auction Facility. It's also below levels reached in the days leading up to the rescue of Bear Stearns in March as well as levels hit in the immediate aftermath of the onset of the credit crunch in August '07.

Last night, CNBC's Charlie Gasparino reported that bond traders were telling him Lehman's bankruptcy wouldn't be the end of the crunch. Later, former Deputy Treasury Secretary Roger Altman voiced similar concerns. Alan Greenspan also thinks there is more pain to come. This is the first time during the current crisis that we've heard such united pessimism.

On the other hand, Bernanke and Paulson's decision not to force through a government-backed bailout implies that they -- both of whom have learned how to craft a rescue or two -- didn't think the prospect of Lehman's failure, or Merrill's or A.I.G.'s, would be a disastrous event for markets.

Is it time to look to Barry Ritholtz's favorite indicator?