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Thursday, September 25, 2008

Some Evidence This May Really Be Necessary

We found it well nigh impossible to support the original Paulson "plan" for solving the current financial crisis. Giving one person the authority to handout $700 billion without oversight or even objective criteria for spending it is hardly worthy of being called a plan. It seems more likely to make a terrible situation even worse. However, there is definitely still a major crisis just below the surface, as evidenced by this article in todays' Financial Times:
Bail-out fears hit credit markets: "Amid uncertainty about the plan’s prospects, US money market funds controlling thousands of billions of dollars in assets led a stampede to safety, buying short-term government debt, selling commercial paper and withdrawing funds from the interbank market. As a result, the rates that banks charge each other soared, while yields on Treasury bills plunged."
It was some money market funds "breaking the buck" that got Paulson and Congress panicked into this bill, and this is what causes that. Normally, money market funds are super-safe mutual funds that buy only short term debt from high quality companies (and/or government paper). They maintain their share prices at $1/share, so the feel is "just like" a bank account. Last week was, I believe, the first time ever that any money market fund had a share price drop below a dollar. If money market funds, just about the lowest risk investment in existence, could become unsafe, widespread, catastrophic panic is at hand.

Let's hope our government can pass a bill and run a policy that will pull us away from the abyss. Based on the failure to understand (or at least failure to admit) the root causes of the current crisis, we're concerned.