[IWE] Bailout passes on second try

[D. Scott Katzer]

Hi Jay,

Jay Mehaffey wrote:
> http://money.cnn.com/2008/10/03/news/economy/house_friday_bailout/index.htm?cnn=yes
 >
> Hopefully this works, but I deeply suspect that this is really just
> enough to tide us over till we get past the election.

I'm not optimistic, but we'll see.  If it even slows the trend in the 
freezing of the credit markets, it might be worth it as an interim 
measure.  I think almost everyone agrees that more is needed, but they 
disagree about the real cost.

Keep an eye on the TED Spread (3 month LIBOR - 3 month Treasury Bill). 
So far, the trend has been in the wrong direction - the index is 
increasing, indicating short-term credit is continuing to get more 
expensive compared to Treasury bills.  It closed at 3.87% today.

http://www.bloomberg.com/apps/cbuilder?ticker1=.TEDSP%3AIND

More on the TED Spread is here:
http://www.econbrowser.com/archives/2008/09/understanding_t.html

I have a nagging fear that expectations are that today's bill isn't 
going to work, so the TED Spread is staying high, thus it's becoming a 
self-fulfilling prophecy that Uncle Sam will have to spend much more. 
Perhaps the big players figure that if they can stay on the sidelines a 
few more weeks, then they'll have a better chance of getting a huge 
bailout or something.

:-(

Krugman argues today (as have some others) that Paulson made things much 
worse by letting Lehman Brothers fail rather than rescuing it.  I don't 
know enough about that to offer an opinion, but it's certainly plausible 
that if big investors are worried about big firms, then that could cause 
big problems even if the banks are objectively under less stress as a 
result of today's actions.

http://www.nytimes.com/2008/10/03/opinion/03krugman.html?ref=opinion

Interesting times...  :-(

Cheers,
Scott.

> Jay