Oops, New Bailout Isn't Working Either

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?

Comments

[topper2t]

Of course the bail out is working! Those rich bankers are sucking up that free tax payer money like hogs at the slop trough! Was that not the idea?

[doogiedude]

I agree. The bailout is working for some.

[Firewood]

The rest of the world has lived through this before, as has America, but the era of American hegemony is coming to an end. Once all the derivative debt is shaken out, the private banks will be a shadow of their former selves and Americans will be left with the socialized system of banking that has also served them before.
Read it and weep:
http://www.webofdebt.com/articles/modest_proposal.php

I have fears that the American power vacuum will create some really messy wars. When corporate greed joins hands with governmental meddling in markets (Fannie, Freddie e.g.,) the beginning.....BEGINNING.... result is what is going on right now. There is a hell of a lot more to come. Get used to living poor.....check with your relatives that lived through the Depression and read Grapes of Wrath.
Republicans will be a very small voice in the wilderness, hence the expendable candidates offered up by them for this election. They know they have had it.
Firewood.

[sposton]

Why not try the traditional medicine these cretins always prescribe? Competition! Start government banks that will provide credit to real economy. Why dump all this money down the back hole, with predictably bad results, when you can start your own bank?

[KillTheMessenger]

What's wrong with cash? I am sitting on a pile of it and I am sitting pretty.

And what's wrong with me waiting for housing prices to come down another 15 percent before I even start shopping around for a new home?

You did not really expect ME to bail out some old baby boomer who wants to cash in on his home, do you?

Seriously?

[Diana999]

haha how right you are!

[doogiedude]

IMHO, until action is taken to address the demand side of the credit market, nothing will work. Nada, zip, zilch.

Not to sound like a broken record but....

I also think the globalization of labor, via "free trade" agreements and the like, has played a large role in our current situation. Corporations, over the last decade, moved production out of America to places with oppressive governments and no environmental protection laws in pursuit of lower production costs. Simultaneously, they continued to raise prices for their products in pursuit of profit growth so valued by shareholders.

This exodus of labor has left earnings for the non wealthy on a downward trend, while prices have increased. The only way to get consumers to pay more while making less is with increased credit. Of course this bubble will ultimately burst, hence here we are.

Until earnings growth eclipses price growth, the economic crisis will linger. This will only happen when non wealthy earnings increase or prices decrease or both. Programs such as infrastructure spending, tax cuts only for the non-wealthy, fair trade agreements (not free trade), housing relief (enhanced FHA) are some tools to help accomplish this. America has to go back to being a production oriented economy as opposed to the consumer oriented economy it is today.

[BlueZoo]

As long as the same management are still running the same companies that got us into this mess, nobody is going to want to invest in these companies. Investors aren't stupid!

[MuchMadness]

Investors and creditors other than the ones receiving the big bailouts want to see the U.S. government punish someone to restore trust.

[vendredi]

A few corrections to your post:

These various bailouts aren't so people can get access to "money" again (at least not as most of us understand money). It's so people can get access to *more debt*. When people quit thinking of debt as money, it'll unravel some major too-big-to-fails for sure but the serfs will be one step closer to economic freedom. But more debt in the near future is not only unrealistic, it would be counterproductive if it were possible.

It won't take "weeks (months?)" for borrowing costs to returne to pre-Lehman levels. It will take *years*. And my hope is, that they will *never* again get there within my lifetime. Borrowing SHOULD be stringent. The fact that it hasn't been, for decades, is what brought us to this (inevitable, often foreseen and warned of) point.

That "Rome wasn't built in a day" is your best point. It took decades to create this mess and it will take *at least* years (if not decades) to clean it up. The Great Depression took a decade or more (depending on your perspective). And this mess is many times larger than that was.

I may be misreading you but your post sounds to me like you're looking for a quick-fix government save. Ain't gonna happen. The sooner commentators accept this, the sooner we'll have more intelligent commentary and perhaps some real solutions.

[joebhed]

True economic freedom may be one outcome of the evolving conflagration.
And "borrowing" should be much more limited, and much less necessary.
I definitely agree that we should be living within our means.

But, to me, those things can only come about through a socio-economic revolution that necessarily manifests itself through the government.
A revolution via the pen, to be sure.
But a revolution nonetheless.

This debacle has been brought about by the private money-creating banking cabal under their facade as the federal reserve banking system. Private bankers. In your pocket.

We need to replace them with something more manageable.
I don't mean regulation.

I mean abolition of the private money-creating power, replacing it with one of a debt-free government issue, coupled with a 100 percent reserve private banking system.

In such a case, all future money that is created to foster real US-produced economic growth and price stability will be created as credits within the federal government.
Their is no borrowing cost for the money that is needed to run the country.
We don't borrow it. We provide it.
To ourselves.
Money re-becomes a medium of exchange.
As such, it is exchanged in a private banking market on the basis of the money that is deposited is equal to the money that is lent.

I hope that didn't sound like a quick fix.
Because it will be a tremendous struggle.

But, the sooner we get started, the better we will all be.

[vendredi]

Joebhed:

100% reserve banking and money as medium of exchange don't sound like a quick-fix to me.

In fact, they're so not-quick-fix that I think they aren't in the *near* future. "Fix" yes. "Quick" no.

You're singing a favourite song of mine with that tune. But I also think there is too much upheaval (of entrenched "wealth") intrinsic in this, to make it a reality anytime soon. The Powers That Be (hi there, Paulson) will ride this fractional-banking, central-banking pig all the way to the bottom first, on the backs of serfs who just want to go to work, earn a paycheque, and make the day's ends meet without investigating all about the intricacies of high finance. And meanwhile, anyone talking about this (100% reserve banking) too soon will find themselves donning the dreaded tinfoil hat.

All in its own time. Maybe after the Greater Depression, when people start reading Jefferson again. One step at a time, I think....

[olderwhiiteman]

sanity...sanity! I love it!

as my grandaddy said: "you can't borrow your way out of debt"

[Ed438]

I'm not going to bash Bush again since he and his cronies are doing their own self-bashing, thank you. But as I wrote some days ago (Oct. 12th) on my blog:

"The Bush administration, having swindled taxpayers out of more money in the earlier settlement, are in major panic mode and are having to try various other schemes to shore up an economy which, after all, they were were the ones who screwed up.

Since this is a crisis of confidence and since there is no confidence in the Bushies, I don't believe they can ever be the ones to solve the problems, whether or not they can be solved. It really seems that another administration needs to deal with the mess and we can only hope it is the Obamas and not the McCains who will."

[BottomLine2008]

People need the money, not the banks.

[Diana999]

Right.

[chrisro]

Access to money and credit is not the problem.

It only creates further problems...as further malinvestment occurs.

The problem is that bad investments need to be liquidated and the government is trying to prevent it....just like the 1930's..Sadly, that episode was drawn out for 16 years when (finally) the market was allowed to operate once again.

[bored2tears]

You are absolutely correct.

[Egalitare]

NOTHING is going to work until more of us have jobs!

[paixa3]

...and good paying ones.

[twofish]

Well, you know what? You're going to have to fight for them. Not figuratively, literally. The workers let the unions slide, bought into management BS about how bad they are for us, and now you're going to have to put your butts on the line to get them back. And to keep them from being corrupted as some were before -- get militant and stay vigilant! It's the only counterweight to corporate abuse. Aside from a government with the average person's well being at heart -- and how often does THAT happen?

[KillTheMessenger]

See, you should have stayed in school!

[Sharkie]

An economy run on corruption, greed, incompetence, and now fear is certainly not worth saving. Banks are really no longer needed. We have seen their safety has been exaggerated and if you absolutely need a loan there are on-line services willing to lend for qualified obligations. Wall Street Financials, or the markets of speculation investment, are through. At this point there is certainly no reason to bail out 29 year olds driving Maserati"s that are longing to sell you their specially endorsed investment pick. That should obviously be over. Foreign lenders appear to be through as well. This leaves the printing press the only tool left for the bankrupt Federal Reserve. There is no reason to go there either. Congress has no reason to sub-out currency obligations any more. Fractional reserve banking, the kind that creates 10 to 100 virtual dollars for every one on deposit and lend them to you with interest, has led us to the largest financial collapse ever seen. Another excellent reason not to bring them back.
Generations ago, no one would put a dime in a bank or except paper dollars of any kind. They got around this by backing the currency with gold and silver. Then, after money in banks was the norm, they removed the very backing that created their deposits in the first place. It's over, and good ridance to banks, central banks and especially investment banks.

[olderwhiiteman]

oh if only that could happen...

[cylindar]

Basically it is everyone for themselves. There is no more order in the economy. This is a bad one. The good news is that a lot of people who did not deserve t be well off will get hammered and that makes me feel good.

[iambusto]

Why should the banks be eager to lend credit in this economy? with economy shrinking, shouldnt the banks be smart to just shore up capital.

lending to deadbeats caused the problem in the first place.

[Yermammy]

I know, but we have to be respectful and call them Wall Streeters. lol!