Oops, New Bailout Isn't Working Either

11/15/2008 05:12 am ET | Updated May 25, 2011

The government's seizure of stakes in nine banks (with thousands of others to come) was designed to finally return the credit markets to some semblance of normal, so consumers and businesses can get access to money again. Unfortunately, we're still waiting.

Yes, the price of credit default swaps (bankruptcy insurance) on the big banks dropped, as traders correctly surmised that these firms are now a lot less likely to go belly up. And bank borrowing costs dropped, thanks to the new FDIC insurance. And the rate that banks charge each other for money dropped a whisker.

But Treasury bill yields are still infinitesimal, and the economy is still gasping for air. Why? Because cash is king, and everyone is scared to death.

Also, a whole bunch of mortgage rates are going to reset soon (Citi puts the November resets at $24 billion). This will exacerbate the foreclosure crisis and put more pressure on the housing market.

I know: Be patient. Rome wasn't rebuilt in a day. But take a look at this chart and note how quickly the credit markets tightened after Lehman Brothers failed. And then wonder what will happen if it really does take weeks (months?) for borrowing costs to return to pre-Lehman levels.

(Hint: Not good. That's part of why the stock market's crashing again today.)

See Also:
But What About The Next $1 Trillion In Bank Writeoffs?