Hey, Congress: This Isn't Working

[solarbird]

Good morning. If you missed last night's overnight posts, please go here and here. Most of the material I would've covered in this post, I posted as it was happening overnight.

The TED spread bounced off 355 basis points this morning, currently "down" to what would've been a four-alarm fire at 327. This indicates a near-refusal of banks to lend to one another as the market becomes less, not more, transparent. Separately from the bailout, the Fed has just pumped another US$330B into the money markets:

WASHINGTON (MarketWatch) -- The Federal Reserve and other major central banks took unprecedented steps Monday to pour hundreds of billions of dollars in additional liquidity into money markets left paralyzed by fears of further bank failures in the United States and Europe.
The Fed said it was boosting the size of its dollar swap arrangements to $620 billion from $290 billion previously. The agreement, with nine central banks, allows authorities to provide short-term dollar loans to commercial banks in an effort to ease short-term funding woes that have resulted from reluctance by commercial banks to lend short-term funds to each other through the interbank market.

Dr. Roubini notes that the risk of systemic financial meltdown is as high as ever, if not higher. Mish says "the closer one looks the more one can see that Nancy Pelosi and Barney Frank gave in to every wish of the Treasury" and has a set of phone numbers to fax and call against it. Karl Denninger has a video here as part of his post here (but the video is standalone) talking about why this won't work; if you know people who won't read things but will watch videos, well, send it to them.

Wachovia Bank was taken over today by Citibank through a very suspect FDIC action that the FDIC claims was not an FDIC intervention but also oh yeah the FDIC is on the hook for up to $42B in losses; they also say Wachovia was sound. What? Is this even supposed to make sense?

NASDAQ down 4% or so; S&P 500 down 3.5%; Dow's doing better(!) down only 2.5% or so. If this was an airplane I'd be grabbing parachutes.

eta: Fortune:

None of these concessions seriously cripples Mr Paulson’s flexibility or the programme’s appeal to the industry. He can structure the warrants to be painful or painless. The provisions on executive do not seriously hinder companies’ ability to hand over fat paycheques. The prospect of higher taxes five years from now should not affect a firm’s decision on whether to participate today.

Another week, another round of kabuki theatre, another round of unconscionable accumulation of executive power.

Comments

[llachglin.livejournal.com]

The bailout plan apparently just got voted down.

Don't celebrate. Credit is freezing solid right now, meaning that the Big Depression is about to start anyway.

[solarbird]

What'll happen next will depend upon how quickly (and whether!) the House of Representatives is willing to put together a bill that will actually not make things worse.

If they decide on the other hand to go out and do nothing - throw a little tantrum, go home - then we are in for it. But not as badly as if this bill had passed.

[llachglin.livejournal.com]

I'm of the opinion that doing nothing is going to be really, really, bad, so I'm not entirely sure that the bill just voted down would have been worse.

What to do now? My instinct is socialization through issuing of preferred shares, backed by nationalization in severe cases. That is, give them the capital to lend but get public ownership in return so that we can receive a profit when they do. If they won't lend, then the government should take their assets and do it for them. Invest that capital in infrastructure, alternative energy, small business loans--anything that will create actual economic activity instead of speculative delusion. Create a homeowners trust corporation to keep people in their homes. Create new regulations so that banks and investment firms won't just replicate this crisis down the road.

It's time for a bigger, better New Deal.

[solarbird]

I'm just trying to prevent a bond-market dislocation. If that happens, there's no ability to finance government debt anymore, and then shortly thereafter there's no money anymore. Anywhere.

You don't get a lot worse than that. And that was the downside option of this bill, with an upside consisting of maybe a little temporary rally in stocks based on optimism and nothing else, because the bill didn't address any of the actual problems, but did use US$700B-plus of the money you want to spend for your "bigger, better New Deal."

[llachglin.livejournal.com]

Recapitalization of the financial markets, even in a form barely above looting (if that), might have helped, particularly if the public got some upside (though those provisions were severely weakened in the final draft).

Like I said, I'm not sure the bill would have been worse. But I'm not sure it would have been better. My take on what to do next is fix credit without draining the treasury. The problem is that any plan as good or better than the plan that failed will get even fewer Republican votes, and the Democrats aren't going to find a bill that will keep all their members on board without significant Republican support.

But right now the likely outcome is recession like you and I haven't seen and can't quite imagine.

[xpioti.livejournal.com]

I hate to sound pathetic, but you're far more savvy with this than I. I have accounts with Wachovia. How do you think this will affect me? (We have accounts elsewhere as well, but that's our primary.) I've read the blah blah on the FDIC site, and, while I'm glad it's not Chase, I don't know how displeased I should be.