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 ...

592373_080925_TED5.gif
592373_080925_TED5.gif

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.

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.

See Also: Is It Time for the U.S. to Issue a Digital Dollar?

More from Foreign Policy

A worker cuts the nose off the last Ukraine's Tupolev-22M3, the Soviet-made strategic aircraft able to carry nuclear weapons at a military base in Poltava, Ukraine on Jan. 27, 2006. A total of 60 aircraft were destroyed  according to the USA-Ukrainian disarmament agreement.
A worker cuts the nose off the last Ukraine's Tupolev-22M3, the Soviet-made strategic aircraft able to carry nuclear weapons at a military base in Poltava, Ukraine on Jan. 27, 2006. A total of 60 aircraft were destroyed according to the USA-Ukrainian disarmament agreement.

Why Do People Hate Realism So Much?

The school of thought doesn’t explain everything—but its proponents foresaw the potential for conflict over Ukraine long before it erupted.

Employees watch a cargo ship at a port in China, which is experiencing an economic downturn.
Employees watch a cargo ship at a port in China, which is experiencing an economic downturn.

China’s Crisis of Confidence

What if, instead of being a competitor, China can no longer afford to compete at all?

Federal Reserve Chair Jerome Powell testifies in the U.S. Senate in Washington on Sept. 24, 2020.
Federal Reserve Chair Jerome Powell testifies in the U.S. Senate in Washington on Sept. 24, 2020.

Why This Global Economic Crisis Is Different

This is the first time since World War II that there may be no cooperative way out.

Chinese President Xi Jinping (left) and Premier Li Keqiang applaud at the closing session of the National People's Congress at the Great Hall of the People in Beijing on March 11.
Chinese President Xi Jinping (left) and Premier Li Keqiang applaud at the closing session of the National People's Congress at the Great Hall of the People in Beijing on March 11.

China Is Hardening Itself for Economic War

Beijing is trying to close economic vulnerabilities out of fear of U.S. containment.