Sorry, Hank, Bailout Isn't Working

The 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. We’re still waiting.

Yes, the price of credit default swaps on the big banks dropped, as traders correctly surmised that these firms are now a lot less likely to go belly up.  And bank commercial paper and debt costs dropped, thanks to the new FDIC insurance.  And Libor dropped a whisker.  And TED a tad.

But Treasury yields are still infinitesimal, LIBOR and TED are still sky high, and the economy is still gasping for air.  (See the WSJ chart to left.)  Why? Because cash is king, and everyone is scared to death.

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

We know: Be patient. Rome wasn’t rebuilt in a day.  But note how quickly the credit markets tightened after Lehman failed–and how immediately everyone panicked when they saw that. And then wonder what will happen if it really does take weeks (months?) for borrowing costs to return to pre-Lehman levels.

See Also:
Global Shipping Runs Out Of Credit, Grinds To A Halt
The Compleat Nouriel Roubini

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