Playing For Time?

While the bounce of the stock markets on Tuesday, following their dramatic decline after the House of Representatives failed to pass the financial 'Bailout' bill on Tuesday, was welcome, it was also expected and unlikely to be a good indicator of future behaviour.

Investors quite rightly saw bargains to be snapped up and they will probably sell their new holdings for a profit - sooner, rather than later, in order to avoid losses if the market falls again this week.

The failure of the Congress to pass a bailout package is problematic though.

While, in general, we do not agree with Government interference in the financial markets, and certainly would have preferred less intervention in the past, it is difficult to see how else the current crisis can be resolved.

The problem is that the stock market is not the problem.

Even if it were to recover all of the losses of the past week, it would do nothing to restore confidence in the credit markets.

Banks, businesses and even individuals are finding it tough to get credit, even of the short-term kind - as evidenced by the fact that the inter-bank lending rate in London (LIBOR) has reached an historic high.

Without liquidity, businesses have problems meeting their short-term financial obligations, including paying their employees.

The Central Banks of the major world economies have been providing this liquidity (cash) for the past few weeks, but this has not restored confidence enough to attract back those who fled money market accounts in record numbers last week.

As we noted on these pages a week ago, we are still not convinced that the bailout plan, even if implemented would solve this problem.

It certainly will have the opposite effect if, when the Congress returns on Thursday, they pass a popularist package that rewards left-wing groups like ACORN, or insists upon more widely limiting executive compensation or forcing financial companies to offer places in their boardrooms to union bosses.

The financial bail-out plan though seems to be all we have on offer now, despite the fact that many economists and financiers disagree with the approach of the Treasury.

If the delay in passing legislation were to result in a re-examinatiom of the crisis and steps that could be taken to solve it, we would be much happier.

Little mention has been made of extending the guarantees from the Federal Deposit Insurance Corporation (FDIC), increasing deposit insurance and allowing them to help banks that find themselves on the edge.

By doing so, the government would be targeting commercial banks - the ones who are finding themselves over-exposed to the toxic mortgage debt in the system, and helping to prevent any further high-profile bank failures like those we have seen in the last week.

The issues involved here are complex, but just because a problem is difficult to understand, does not mean that we should not attempt to do so.

By acting in such a rushed and desperate way, Congress could end up doing the wrong thing, just to be seen to be doing something, then find that it has had no effect on the problem they were trying to solve.

As an aside, while we respect the fact that there is a Jewish holiday this week, why, when the situation is so critical, did members of Congress decide to take two days off and come back to the issue on Thursday.

Is there no one in U.S. politics today who actually cares about his or her reputation and 'doing the right thing'?

It is little surprise to us that this Congress, and politicians in general, are regarded with so little respect nowadays. They do so little to deserve it.