Guys, this has gone so far past helping the financial system out of this mess.
The ISM manufacturing data out today were more than a little weak, they were awful. The manufacturing data were the worst since October 2001 during the last recession; and the largest drop since January 1984. The prices paid - a key for a read on inflation / deflation, saw the largest drop in 60 years, implying deflation is a critical risk. These data suggest an economy that is contracting faster than expected.
$850B got wiped out of 401(k)'s on Monday. If we're not careful the market can be 50% below its high, that's what happened in 1973-74.
ISI, a top-rated non-partisan economics advisory came out today and are showing that their trucking and home surveys are in deep recession territory. They are calling for a recession: This will be a big blow to Main St. irrespective of how many banks fail, just that the blow falls heavier the worse the liquidity crisis gets.
And agreed, this pkg was poorly sold and the nexus from banking to Main St was poorly explained up-front. It also needed oversight - which is coming in the pkg the Senate votes on tonight.
The jump in overnight dollar Libor (a key lending rate) – the London interbank offered rate – shows the fear of lenders that, with banks being rescued by the week, they may never see the funds they lend again. Not a good fear to leave unaddressed.
We need to get past B/S politics and consider the health of the wider economy. Do you know how we got out of the Depression? It was when govt funds were injected into fixing banks and housing sectors in 1933.
Two IMF economists did a study (Laeven and Valencia),
http://www.imf.org/external/pubs/cat...cfm?sk=22345.0
They systemically examined
all banking crises between 1970-07, detailing how much financial crises cost and how they are fixed. The study examined 42 crises / 37 countries
The evidence is clear. In most financial meltdowns a
comprehensive solution was required, and the
sooner it was provided the better. Delaying, like Japan did - first bank failed in '91 and they started real action in '98 - does not work: Ostrich's head in the sand approach is plain dumb.
Eventually most governments realize the need for a comprehensive solution to the crisis, involving public monies via:
- bank recapitalisation
- debt forgiveness
In 75% of the cases, governments added to bank capital by:
injecting funds for preferred stock / common stock / debt
- 2/3 of of the time, governments set up institutions to manage distressed assets (this is closer to the Treasury plan, personally I'd like taxpayers to get some equity too)
I'll leave you w/ the gist of what we face from a BCA Economics summary - and while we may all be pissed that money will be spent to get in front of this, consider 2 things:
- we have had to act before and used govt funds
and actually got money back for taxpayers as the problem was addressed; this has happened several times including Chrysler in '79 and more closely, The Resolution Trust Corp (to deal w/ S&L crisis) from 1989-93 (as mentioned by a poster above, but also look at Sweden's case in 92 where the cost was halved and worked out faster through quick, concerted action)
- the costs of not doing so can be far worse than doing something today
Quote:
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Originally Posted by BCA Research
The U.S. manufacturing ISM survey plunged today, signaling that the feedback loop from the financial system to the economy is now biting.
Washington is still debating the TARP plan, with changes/additions being considered. The crunch in the banking system has been steadily working its way into the economy this year. However, the floor gave way in September, according to the ISM manufacturing survey (other global purchasing managers' surveys showed a similar sharp drop, underscoring that a global slump is underway). The survey was taken before Monday's fiasco in Washington.
Companies have found it increasingly difficult to get working capital, and orders are now being slashed, with pink slips to follow. Those authorities still arguing about a "bailout for rich bankers/brokers", or worrying about future inflation, are out of touch with the real economy.
The immediate threat is a deep recession and accelerating debt deflation.
Bottom line: A major fork in the road has been reached: either the authorities quickly act to unfreeze the banking system (along the lines of the Ireland's 100% guarantee of bank deposits), or else the economy will slide into a black hole.
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I'm not registered w/ either party. Nor am I affiliated w/ any independent party. I'm just an economics geek. There's times when politics gets in the way of doing what is needed.