Thoreau observed that the mass of men lead lives of quiet desperation.

Let that mass buy and sell on an open market, however, and their desperation seems far less quiet. Instead, as they panic and blindly follow each other around, we reach situations like our current, ridiculous stock market mess, with the Dow dipping below 8000.

Before we go on, let’s be clear on exactly what that means. Eight thousand points is just about half of this year’s highest price. Which means that everyone who’s buying or selling stock, collectively, has come to the agreement that the thirty companies that make up the Dow Jones Industrial Average – thirty of the largest companies in the world, like Walmart, Coca-Cola, ExxonMobil, and Pfizer – have just lost 50% of their long-term value.

Which, obviously, is ridiculous. Sure, we’re looking at some sort of recession ahead here. But do we really foresee a permanent 50% decrease in bargain shopping, soda drinking, gas buying and prescription medication taking? Certainly, the Dow should have dropped. But only by a relatively small amount – probably less than 10%. Which means that, if we’ve instead dropped 50%, we clearly have so many idiots involved in determining the price of the Dow that the price tells us a lot about panic and perception, but pretty much nothing at all about the actual state of the underlying market itself.

In fact, as we’ve all heard countless times, the real problem to fear isn’t even the price of stocks in the first place – it’s the potential seizing up of world credit markets. Companies large and small depend on short-term credit to smooth out their inherently unpredictable day-to-day cash flow; individuals need it to buy houses and cars, to go to college, or to simply charge groceries. All of which is to say, while a low-priced Dow might reflect something about the economy (or not, in our current case), a lack of credit would cause something in the economy – namely, to cause it to grind to a halt.

So, if that’s the problem, how to monitor it? And, if not the Dow, which numbers to follow obsessively from day to day?

In short, LIBOR and short-term Treasury yield.

Allow me to explain.

The first thing we want to know is, are banks willing to make loans? Do they trust that people can pay those loans back? And, most crucially, do they trust each other? Because, basically, the credit crisis kicked off when banks started to realize that, after a string of bank defaults, any number of other banks might similarly be teetering near collapse. So, reasonably, they simply stopped loaning money to other banks. If you don’t know what’s on any other bank’s balance sheet, don’t know if they’re healthy or exceedingly sick, probably better to play it safe and simply not lend to them at all.

So the number we’d want to know is, how much would banks, on average, charge to lend to other banks? Much like with an individual credit card, where banks charge people with bad credit much higher interest rates than people with good credit, so would banks charge higher interest rates to other banks if they thought that most had potentially bad credit.

To measure that, you’d probably have to call around from bank to bank, asking how much they’d charge to lend to other banks. Fortunately, a couple of blokes in the UK do that for us on a daily basis, then publish that number as the London Inter-Bank Offered Rate, or LIBOR.

If LIBOR goes up, banks are trusting each other less, and the credit crisis is getting worse; if LIBOR goes down, they’re trusting each other more, and things are getting better.

You can follow LIBOR data in the first chart on this page. But, in short, the three-month LIBOR is currently at about 4.82%; a month ago, it was 2.82%. A trend, again, in the ‘not good’ direction, though one I suspect to see reverse itself this coming week.

But LIBOR only paints half of the picture. It gives us a sense of what banks think about the state of other banks, and therefore of the credit market as a whole. But it doesn’t tell us how they’re acting on that information. Are they actively making loans, investing in stocks, and generally putting capital into the market in a way that will ease up the credit crunch? Or are they playing it safe, and hanging on to their cash?

Fortunately for us, there’s a good metric here, too. Because when banks hold on to ‘cash’ what they actually do (at least the lion’s share of the time) is buy Treasury Bills. Treasury Bills are exceedingly safe – since they’re backed by the US Government, if T-Bills start defaulting, we don’t have a US Government, and dollars themselves aren’t worth anything anyway – but they also pay out at least a small amount of interest, and are therefore better than simply stuffing money under a very large bank mattress.

So, in short, banks put unused cash in Treasury Bills. And, much like with any other kinds of lending, the more people willing to make a loan, the less interest any of them can charge. Since a Treasury Bill is essentially a loan to the US Government, if lots of banks have lots of cash, and are willing to make such loans, the interest rate the US has to pay out on those Treasury Bills – the ‘yield’ – goes down. Conversely, if banks put their money in other, more lucrative places, the government needs to pay more on their Treasury Bill loans to compete for that money, so the yield goes up.

In other words, if banks are still freaking out and holding money in cash, Treasury yields go down. If the credit market starts to thaw out, and they start to make the wide array of loans we need to power the economy, Treasury yields go up.

Fortunately for us, the US Treasury tracks these numbers themselves. Currently, the 30-day Treasury Bill yields just 0.06%, down from 3.98% one year ago (a 98.5% drop!), and a price so low it’s basically equivalent to giving money to the US Government for free.

Here, too, I expect at least some degree of turnaround this week, but it certainly paints a picture of how bad the credit mess actually is.

So, to recap:

1. The Dow is a worthless number to follow at this point, because too many idiots panicking have made it excessively low, and mindlessly volatile.

2. LIBOR is a better measure, as it shows how much banks trust each other. If LIBOR is going down, things are looking up for the global economy.

3. Similarly, Treasury yield is a better measure, as it shows whether banks are actually making loans and investments, or just sitting on cash. Treasury yields going up would be an excellent sign for a credit market thaw.