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Home Front Economy
Crisis of confidence shakes banks ahead of Congressional vote today
2008-10-01
The global banking system was gripped by a worsening crisis of confidence yesterday as the leaders of the US Congress struggled to salvage the administration's $700bn bail-out plan.

"Congress must act," said President George W. Bush, expressing disappointment the government's bill was thrown out the previous day. "The reality is that we are in an urgent situation, and the consequences will grow worse each day if we do not act."

With leaders of both parties pledging there would be legislation in Congress this week, senators were discussing bringing the bail-out plan before the upper house as early as tonight.

Although stock markets steadied after the savage sell-off on Monday night sparked by the failed vote, overnight interbank lending rates spiked to painfully high levels in the major currencies, with overnight dollar Libor leaping 4.3 percentage points to a seven-year high of 6.88 per cent.

The money market strains were exacerbated by the end of the financial quarter yesterday, a time when there is increased demand for funds and banks have to balance their books.

The language of bankers and analysts grew apocalyptic as they warned that the near total seizure gripping money markets could turn into widespread financial meltdown.

"This crisis of confidence seems grossly out of proportion with the albeit fragile fundamentals of the financial system and of the global economy," said Marco Annunziata, chief economist at UniCredit. "But it is now threatening to turn into a self-fulfilling run on the system which could trigger a global financial and economic meltdown."

Further signs of strain emerged in Europe when Dexia, the Belgian-French bank that specialises in local authority finance, received a €6.4bn ($9bn) cash injection from the Belgian, French and Luxembourg governments after its shares lost 30 per cent of their value on Monday.

Banks in Europe increasingly appeared to be conducting all money market operations through the European Central Bank as increased injections of funding were met with rapid increases in the amount of money banks were opting to put on deposit at the central bank. One senior liquidity manager at a large European bank said this was because almost no bank was willing to lend to any other.
That's the key evidence that that credit system is right on the edge of collapse, folks.
Posted by:lotp

#13  See also REDDIT > BBC: US SUPERPOWER STATUS IS SHAKEN.
Posted by: JosephMendiola   2008-10-01 22:18  

#12  RJ- I sincerely doubt it; the way he has been groveling this past week, it would not surprise me to see him at the table in the House or Senate ( whichever one finally approves the latest version last) and actually snatch it away and sign it before the previous signature is dry.
Posted by: USN, Ret.   2008-10-01 17:38  

#11  I THINK Bush has the balls to veto it if it's too pork laden.
(I sincerely hope so)
Posted by: Redneck Jim   2008-10-01 16:52  

#10  The Freddy Krueger bailout bill moves through the Senate gaining more pork and earmarks.

$875 Billion and growing.

Really a bill onto itself, the mental health parity measure has been a bipartisan priority for top lawmakers in both chambers but has stalled because of disagreements again over how to pay for its estimated $3.8 billion five-year cost. In the current climate, that seems to be no longer a stumbling block, and if the Treasury plan becomes law, it will also.

The rural school aid is smaller —about $3.3 billion over the next five years— but has great importance for many Western communities and could be important then in the House.

Congressional Budget Office estimates indicate that the net impact will be to add almost $105 billion to an already large deficit next year, and fiscal conservatives will feel they are being straight-armed by the Senate which has refused to do more to offset the costs. Yahoo News at:

http://news.yahoo.com/s/politico/20081001/pl_politico/14161

Posted by: JohnQC   2008-10-01 12:58  

#9  They hold onto it in less productive and risk averse ways.  They don't lend it out much, and certainly  not to the people who are most likely to use it in economically productive ways.    At best they deposit it with their national bank or the European Central Bank.

That means a substantial reduction in the 'velocity' of the money supply, i.e. how often a dollar or euro is traded for goods or services in a given year. Low velocity = low economic activity/productivity = recession or depression.

The effect starts slowly but then snowballs. That's why you can't look at the stock market today and decide things are just hunky dory out there.

Credit card and mortgage rates will go up - and go up much higher than they would otherwise have done. Businesses will find it hard to finance supply purchases and new hires - or worse, find themselves unable to collect what's owed them by other businesses on time (or at all) and unable to get a bridge loan. That means layoffs and bankruptcies. Consumers will spend less and as a result stores etc. will lay off workers. etc etc

This is the cascade of accelerating failures that we will either slow down now or lose control of quickly.
Posted by: lotp   2008-10-01 12:15  

#8  Out of curiosity, what do all the banks decide to do with the money they aren't using to lend to each other anymore?
Posted by: Grenter, Protector of the Geats   2008-10-01 11:57  

#7  Much more than that.   Overnight lending between banks is quite literally what makes access to credit of all kinds possible for most consumers and businesses.   When it dries up, expect an accelerating economic downturn to follow.
Posted by: lotp   2008-10-01 11:34  

#6  overnight interbank lending rates spiked to painfully high levels in the major currencies, with overnight dollar Libor leaping 4.3 percentage points to a seven-year high of 6.88 per cent.

Kind of like an adjustable rate mortgage ratcheting up, eh?
Posted by: bigjim-ky   2008-10-01 10:11  

#5  .. almost no bank was willing to lend to any other.

Which invites (direct or indirect) nationalization. Stupid rabbit.
Posted by: Procopius2k   2008-10-01 09:29  

#4  "Sow the wind, reap the whirlwind."--King Solomon

Everybody has goofed here: politicians, bankers, and the rest of us. The politicians are playing power games instead of leading. The bankers see money, not wisdom in using it. And for three generations the rest of us have had the attitude, "I want it now."

We have to address this mess on all levels.
Posted by: mom    2008-10-01 09:22  

#3  There is a lot of anger about the bailout bill. I for one get tired of hearing that giant sucking sound that sucks taxpayer money into the Washington blackhole. Get rid of the lobbyists, graft, corruption, influence buying and pedaling, back-door deals, partisan politics, and insidious under-the table vote trolling. Do something about manufacturing, jobs, OUTSOURCING OF JOBS, energy, give-away programs and WE MIGHT MORE WILLING TO LISTEN TO YOU WHEN YOU ASK FOR MORE, AND MORE MONEY.
Posted by: JohnQC   2008-10-01 08:57  

#2  increased injections of funding were met with rapid increases in the amount of money banks were opting to put on deposit at the central bank.

And this is the key reason the bailout will not work. I hate to go all Keynesian on you, but we are falling into a liquidity trap. Congress should instead be appropriating funds for major capital improvements, highways, nuclear power stations, etc., not rescuing the hos who got us into this mess. The capital gains and corporate income taxes should be repealed. We will need spending, not liquidity.
Posted by: Nimble Spemble   2008-10-01 08:40  

#1   a self-fulfilling run on the system

The 'system' is damaged but could function adequately - if the participants all had enough confidence to let it. That's what the bail-out is intended to do: the only reason to believe it could work is that it does not have to affect reality, just perception.
Posted by: Glenmore   2008-10-01 08:25  

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