Friday, October 03, 2008


To no one's surprise, the House passed the rescue bill today, so all will be well, despite the nattering nabobs of negativity like Roubini, who continues to insist that we are on a twelve step staircase down to financial hell, and we've just reached the final step:

Situation Report: So far as I can tell by working the telephones this morning:

  • LIBOR bid only, no offer.
  • Commercial paper market shut down, little trading and no issuance.
  • Corporations have no access to long or short term credit markets -- hence they face massive rollover problems.
  • Brokers are increasingly not dealing with each other.
  • Even the inter-bank market is ceasing up.

This cannot continue for more than a few days. This is the economic equivalent to cardiac arrest.

Now we know this cannot be true, all our leaders have assured us that the $700bn is going to set us back on the road to financial wellness, could they all be wrong? There's even another $150bn in pork stimulus attached to it to make it even more wondrously bipartisan.

Roubini, from the black depths of his pessimism, dares to disagree with Bush, McCain, Palin, Obama, Biden, Paulson, Bernanke, et. al., and predicts another rescue bailout handout in a few days:
I believe that the government will do another Hail Mary pass, with massive guarantees to the short-term commercial credit system and wide open short-term lending by the Fed (2 or 3 times expansion of the Fed balance sheet). If done on a sufficient scale this action will probably work for a while. But none of these financial measures affects the accelerating recession -- which will in turn place more pressure on the financial sector.
Roubini claims that we are facing the following scenario:

- a silent run on the huge mass of uninsured deposits of the banking system and even a run on some insured deposits are small depositors are scared;

- a run on most of the shadow banking system: over 300 non bank mortgage lenders are now bust; the SIVs and conduits are now all bust; the five major brokers dealers are now bust (Bear and Lehman) or still under severe stress even after they have been converted into banks (Merrill, Morgan, Goldman); a run on money market funds; a serious run on hedge funds; a looming refinancing crisis for private equity firms and LBOs);

- a run on the short term liabilities of the corporate sector as the commercial paper market has totally frozen (and experiencing a roll-off) while access to medium terms and long term financings for corporations is frozen at a time when hundreds of billions of dollars of maturing debts need to be rolled over;

- a total seizure of the interbank and money markets.

This is indeed a cardiac arrest for the shadow and non-shadow banking system and for the system of financing of the corporate sector. The shutdown of financing for the corporate system is particularly scary: solvent but illiquid corporations that cannot roll over their maturing debt may now face massive defaults due to this illiquidity. And if the financing of the corporate sectors shuts down and remains shut down the risk of an economic collapse similar to the Great Depression becomes highly likely.

But this cannot be true, because surely we would have read about it in the NYT and other distinguished news sources.

So buck up America, you may be out of work, out of your home, and out of luck, but the system endures. There may not be enough money for healthcare, education, and infrastructure, but there is plenty for CEO salaries, prisons, and endless war. To paraphrase the immortal words of Phil Gramm, "Stop your whining!"


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