The Bailout Bill is almost certainly going to pass. Unfortunately, the initial goal of the bill–to restore confidence–already seems to have failed. Credit markets around the world continue to tighten. This begs the question: What will Hank Paulson and Ben Bernanke do next?
(Likely answer: Cut interest rates)
Bloomberg: Money-market rates in Europe may rise on concern the U.S. government’s $700 billion financial-rescue package will fail to revive confidence among banks anytime soon, exacerbating an unprecedented seizure in lending.
The Libor-OIS spread, a gauge of cash scarcity among banks, widened today to a record. Rates among Asian banks increased to the highest levels in at least nine months… The Libor-OIS spread, the difference between the three- month dollar rate and the overnight indexed swap rate, climbed to 275 basis points today. It’s the third consecutive day the spread has risen to an all-time high. The average was 8 basis points in the 12 months to July 31, 2007, before the credit squeeze began.
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