It’s Saturday night and I think the political leaders are currently meeting right now in DC regarding the bailout proposals. I’m guessing that tomorrow night (Sunday) is the key time to see if any deal will be announced. I can’t see how it won’t be passed. I think it would be taken as a major negative for the markets if no deal was made by Monday’s market open.
But I am not sure if this bailout will actually work. It just might indeed be a literal bailout — just more money pumped (after the billions already injected) into the banks so that they can hoard their cash. The TED spread, which tracks the spreads between different periods of interest rates, and therefore the cost of borrowing and lending, shows that credit markets are locked. Credit right now is worse than it was after 9/11.
Meanwhile world markets have been drifting lower but holding up from collapse. This suggests that people are waiting to see the results of the bailout negotiations. The locked credit market suggests that the finance sector doesn’t want to lend out money right now and is trying to re-capitalize itself so it can fight off further market selling and takeover attempts.
This means that businesses are not getting capital. They can’t invest and will have problems doing business with each other. It’s been like that for about two weeks now. This should bomb the GDP numbers in the future.
So if we give all this money to banks, will that make everything better? Will getting the bad mortgages off their books fix things? Clearly it would help straighten some books, but what’s unclear is what the banks will do with the money they get. They have to date simply held on to the money and not released it again. Also, money is being destroyed with deleveraging going on at a massive rate. This forces the sale of stocks, which has depressed stock prices at the end of the day most days of last week.
Also unclear is whether there will be a reinstatement of previous regulations that did a fairly good job of preventing junk debt speculation. NYTimes had a great op-ed pointing this out. Without some vision of what proper regulation will look like, we will fix nothing with this bailout and it will end up sinking us.
There’s really no options left if this bailout saga doesn’t go through… Though, I’m hoping for a bit more clarity and transparency on how the money will be deployed; sadly I don’t think it will come. We’ll have to deal with a lot of pain, unemployment, and recession either way, I think.
Chances are that we’ll be on our own as citizens and taxpayers, while kleptocrats continue to raid the government coffers. On this, Naomi Klein puts the events within the “shock doctrine” model in a recent interview. And contrary to foreign nations’ beliefs, this will sink the world’s economy too, even if it doesn’t have as much bad debt.