Is the bailout bill urgent?

In sheer economic terms, I tend to doubt that unless Congress puts together a bailout bill before Monday — as seems to be the emerging conventional wisdom — all hell will break loose in markets around the world. As Raghuram G. Rajan told FP earlier this week, the U.S. government’s recent moves have actually given the economy some breathing room:

I think three actions by the regulators have bought us a little bit of time. First, guaranteeing the money-market funds. The second was taking some of the pressure off Goldman Sachs and Morgan Stanley by allowing them to become bank holding companies. And third, announcing the fact that the government was serious about fixing the system.

That said, Senate Majority Whip Dick Durban makes a good point here when he says, “If we start talking about another week or two, it will take another week or two.” What’s more, opportunistic members of Congress will only have more chances to lard up the legislation with irrelevant, possibly harmful additions. So, I can understand why President George W. Bush wants to see action sooner rather than later — even if it isn’t quite as urgent as he says it is.

I could, of course, be catastrophically wrong, and the markets could seize up Monday if Congress doesn’t pass a bill.

Here’s what to look for. Forget about stocks for the moment. Since the main problem that is keeping Ben Bernanke and Hank Paulson up nights is financial institutions’ unwillingness to lend to one another, that’s what we should really be paying attention to. The key indicators to watch in this regard are the so-called TED spread and, relatedly, LIBOR. Here’s what the TED spread is doing these days:

As you might be able to infer, up is bad. If it spikes any further on Monday, we are all in big trouble.