TO WHICH THE HOUSE GOP RESPONSE WAS ADDING SAND:

Lending freezes as anxiety grips capital markets: Credit is so tight, routine transactions have been hobbled. With interbank lending stifled, regulators are worried. (Tom Petruno and Walter Hamilton, 9/26/08, Los Angeles Times)

To many Americans, the scope of the now year-old U.S. financial crisis may be evident only when it shows up in a bad reaction in the stock market. Over the last two days, the market has rallied, yet the credit situation has remained dire.

"If the Dow goes down 1,000 points, you know exactly what that means," said Michael Darda, chief economist at the investment firm MKM Partners in Greenwich, Conn.

"You'll see it on the news and in your 401(k). It's palpable and understandable. If the credit markets freeze, that hits the economy with a lag, but it's just as powerful, maybe more so."

The economy and banking system run on credit, much of it short-term in nature. Untold billions of dollars change hands each day to fund U.S. banks' operations and the workings of companies and local governments.

If that money stops flowing, the economy loses the lubricant that keeps the gears turning.

In normal times, for example, one bank may have a large need for cash just for a day or two. Other banks may have excess cash and are happy to lend it to peers at relatively low interest rates.

In recent weeks, that back-and-forth flow of credit has been badly hampered as banks increasingly have been unwilling to lend to one another, fearful they won't be repaid if financial conditions worsen.

"What credit really is is trust and faith," said Pimco's Gross. At the moment, he said, "there is no trust, there is no faith."

Why now?

Soaring mortgage defaults and plummeting real estate prices have been rocking the financial system for the last year, resulting in massive loan losses for many banks and other institutions that fed the housing mania earlier this decade.

But the fallout from the mortgage debacle reached epic proportions this month, beginning with the government's takeover of ailing mortgage-finance giants Fannie Mae and Freddie Mac on Sept. 7.

That was followed by the failure of brokerage Lehman Bros. Holdings Inc. on Sept. 14, and the Federal Reserve's rescue of insurance titan American International Group on Sept. 16.

On Thursday, federal regulators seized Washington Mutual Inc. in the biggest bank failure in U.S. history.

And Friday, shares of Wachovia Corp., one of the nation's biggest banks and mortgage lenders, dived 27% as many investors fled, fearing that it could be the next institution to fail.

"This is scary," said 75-year-old Dan Fuss, who manages $110 billion in bonds for investment firm Loomis, Sayles & Co. in Boston. "Right now, when you think this through, any bank . . . is at risk" of the market's instant judgment of which institutions are solvent and which are not, he said.

The Federal Reserve and other major central banks have flooded the global financial system with hundreds of billions of dollars in short-term credit this month, trying to calm nerves and get banks to begin lending to one another again.

But the Fed can't force banks to extend credit, least of all when the most primal of instincts -- self-preservation -- rules the day.

In the last two weeks, fear also has gripped other parts of the credit markets.

Money market mutual funds, for example, normally buy short-term IOUs of companies, financial institutions and municipalities. But the $3.3-trillion money fund business has been upended since Sept. 16, when one of the oldest money funds revealed that it had lost 3% of its principal value because of losses on Lehman Bros. IOUs it held.

That marked only the second time in 38 years that a money fund had suffered a loss. The news triggered record outflows from the sector as nervous investors pulled their cash, which in turn drove many fund managers in recent days to stop buying corporate debt and instead load up on super-safe short-term U.S. Treasury bills.

Other big investors, spooked by what they see happening in the banking system, are shunning long-term bonds in favor of hoarding cash. That has stymied states and cities that need to borrow in the bond market to fund public works projects.

$700-billion Wall Street bailout plan is unveiled: It would require the government to gain an equity stake in companies that benefit from the rescue. In an unusual Sunday session of the House, angry lawmakers denounce the plan. (Maura Reynolds and Nicole Gaouette, 9/28/08, Los Angeles Times)

[T]he plan faces fierce opposition from Republicans and Democrats angry at what they say is a taxpayer bailout of Wall Street "fat cats." As the House opened for an unusual Sunday session, lawmakers from both parties rose, one after another, for one-minute speeches denouncing the agreement -- and signaling a continuing struggle as policymakers and their staff work out the final details.

"This morning we should be very much alarmed," said Rep. Scott Garrett (R-N.J.), addressing taxpayers directly. "Obviously, Washington is not listening to your wishes. Those who used to work for Goldman Sachs will support this deal. . . . Those who have blocked reform in the past will support this deal. I will not support this deal."

Rep. Marcy Kaptur (D-Ohio) railed against the agreement and the Wall Street financiers who would be helped. "These criminals have so much political power they can shut down the normal legislative process," she said.

Rep. Ted Poe (R-Texas) rose to compare the administration's urgings to rush a bailout plan to the pressure exerted on Congress to act after the Sept. 11 terrorist attacks.

"This is the same politics of fear we're hearing from the financial fat cats on Wall Street," Poe said. "Backroom deals trouble me because they usually turn out to be bad deals for America."

The conservative Texan was followed and echoed by the staunchly liberal Rep. Dennis J. Kucinich (D-Ohio), who said, "The $700-billion bailout is driven by fear, not fact."

The far Right is the far Left.

Posted by Orrin Judd at September 28, 2008 5:29 PM