How can their be a liquidity crisis without a rise in bank CD rates?

Question

If Countrywide or any other bank raised their relatively low CD rates, i'm sure they would be flooded with deposits. Countrywide just announced a $11.5 draw on their credit lines. I'm sure if Countrywide upped their CD rates to around the same rate that' s on the credit lines, around 6 1/2%, Countrywide could easily draw in $20+ billion in fresh deposits. In summary, I don't understand the headlines screaming "liquidity crisis" while banks are apparently not hurting at all for deposits and keeping their savings rates relatively low. Countrywide's highest yielding CD, for balances over $98,000, is 5.50%.

Answer 1

would that not create a very temporary & short term solution with a very drastic & dangerous problem shortly down the road?

If they just arbitrarily raise rates another whole point as you suggest, & hypothetically, it works & they get fresh cash. Since it will cost them that much or more to get that money, they will have to inflate the cost of lending to you & me, b/c they dont want to just break even or work at a loss. & guess who pays for that? Yes, you & me!

That "solution" will then create a much worse problem as they will continue to need more money just to make the interest payments to the high rates, & will keep needing to satisfy you by artificially making better rates available to people that will just take it & run in a year to a more stable company that is not about to declare bankruptcy. Then, they will need to start all over again. What do you think they are? the US Govt?

Are you going to invest in a company who is on the verge of bankruptcy? dont you want to help them out by putting $100k of your cash to let them pay bills that they are behind on & thier rating is droping by the minute? Do you think some people would be a bit hesitant to do so?

Institutions just cant jack up rates to any level "just because". That is a bad misconception that banks just make up rates to what ever they want them to be.