Justin Fox has a few theories for why this might be the case. The first one is the least likely: basically, that John McCain is right when he says that "there has been significant progress toward a bipartisan agreement" on the bailout. The facts, of course, is that he isn't and there hasn't.
The second theory is that liquidity injections by global central banks, after signally failing to work for the past 14 months, have suddenly started working. That seems improbable to me, too -- if anything, central banks are now lending so much money so freely into the banking system that there's little if any need for banks to lend money to each other. Extra liquidity, in such a scenario, can increase interbank rates as easily as it can decrease them.
The third theory is the least unlikely and the most hopeful:
Maybe we don't need the bailout, at least not in the this-must-happen-tomorrow-or-we'll-all-die sense of late last week. By acting to backstop money market mutual funds, and magically transforming the last two big investment banks standing--Goldman Sachs and Morgan Stanley--into banks, the government already addressed the two big panic button issues of last week. And now most all the remaining financial institutions that anybody might have serious worries about are within the banking system, where we have pretty well-established rules for dealing with insolvency and experienced civil servants who administer them. Not problem solved--nowhere near--but problem steered in a direction where it could conceivably be resolved without emergency legislation right now.
I devoutly wish this were true; I put it at p=0.5, or thereabouts. But even if it is true, it would only represent a slight change in the thing that the bailout is designed to avert. Rather than immediate and certain financial chaos in the event the bailout doesn't happen, we'd just have contingent and could-happen-at-any-time financial chaos. Which is an improvement, but not much of one.
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Elie Elhadj
September 27th, 2008 1:36pmCredit 101 for Bankers
In December 1863, H. McCulloch, U.S. Comptroller of the Currency and later Secretary of the Treasury, wrote to all national banks. Here are some of the paragraphs.
“Let no loans be made that are not secured beyond a reasonable contingency. Do nothing to encourage speculation. Give facilities only to legitimate and prudent transactions.
“Distribute your loans rather than concentrate them in a few hands. Large loans to a single individual or firm, although sometimes proper and necessary, are generally injudicious, and frequently unsafe. Large borrowers are apt to control the bank.
“If you doubt the propriety of discounting an offering, give the bank the benefit of the doubt and decline it. If you have reasons to distrust the integrity of a customer, close his account. Never deal with a rascal under the impression that you can prevent him from cheating you.
“Pay your officers such salaries as will enable them to live comfortably and respectably without stealing; and require of them their entire services. If an officer lives beyond his income, dismiss him; even if his excess of expenditures can be explained consistently with his integrity, still dismiss him. Extravagance, if not a crime, very naturally leads to crime.
“The capital of a bank should be reality, not a fiction; and it should be owned by those who have money to lend, and not by borrowers.
“Pursue a straightforward, upright, legitimate banking business. ‘Splendid financing’ is not legitimate banking, and ‘splendid financiers’ in banking are generally either humbugs or rascals.”
Mr. McCulloch’s wisdom is as relevant today as it was in 1863. Every credit 101 today preaches those principles. However greed acts to ignore them.
The sub-prime mortgage debacle should serve as a reminder, yet again, that deposit taking is a sacred and heavy responsibility of commercial banks and that; commercial banks must remain separate from investment, insurance, and brokerage entities. These entities are no banks and their executives are no bankers. The culture of bankers, articulated by Mr. McCulloch, is stranger to the culture of non-bankers.
The emasculation of the Glass-Steagall Act contaminated commercial banking with the free wheeling and dealing of gamblers in the pursuit of quick and big profits and millions of dollars in ill-earned bonuses.
The next U.S. administration would do well to restore Glass-Steagall and bring back sanity to managing peoples’ saving.
Elie Elhadj
Author: Experiments in Achieving Water and Food Self-Sufficiency in The Middle East
http://journals.aol.com/eeh100/daring-opinion/