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will it be enough? « Previous | |Next »
October 3, 2008

It is widely expected that the US House of Representatives will overturn itself and pass a version of the Paulson package. But will this rescue package be enough of itself to restore trust to the banking system and confidence to the fear-driven markets?

Since nobody trusts anybody any more money markets, interbank markets, inter-dealer markets, short-term commercial paper markets are seizing up in U.S. and in Europe. Since the only source of liquidity are central banks, so the non-financial corporates that need to roll over maturing debt have no access to Fed liquidity, nor to short- or long-term credit. So there is a need for Congress to do more than just buy and park bad assets.

PinnICongress.jpg Ingram Pinn

The bailout plan doesn’t really go to the problem, which is that banks have a shortfall of capital. It looks as if there is a policy need to triage: to shut down weak banks and decide who to save. Then there is the need to recapitalize the banking system so they’ll extend credit. Everybody needs to reduce debt and the Federal Reserve needs to guarantee all deposits, regardless of amount.

The economic narrative sure has changed in Australia: from tightly squeezing inflation arising from a boom to fast tracking big infrastructure spending to prevent a recession. That is a sure sign that the financial crisis and its consequences for the real economy, in the world and Australia, have become more disturbing over the past few weeks. It is a scenario that has been consistently downplayed by the economic policy makers at Treasury, the Reserve Bank of Australia, and the Rudd Government.

| Posted by Gary Sauer-Thompson at 8:56 AM |