The median August sales price was $350,140, down from $588,670 a year ago. CAR chief economist Leslie Appleton-Young said it’s too early to call a bottom for prices, which will “experience additional downward pressure as we move into the off-peak season in the coming months, and will continue to face pressure from distressed sales,” she said.

Read it all.

What would you pay, sight unseen, for a house that nobody wants, on a hard-luck street where no houses are selling?

That question is easy compared to the one confronting the Treasury Department as Washington works toward a vast bailout of financial institutions. Treasury Secretary Henry M. Paulson Jr. is proposing to spend up to $700 billion to buy troubled investments that even Wall Street is struggling to put a price on.

A big concern in Washington ”” and among many ordinary Americans ”” is that the difficulty in valuing these assets could result in the government’s buying them for more than they will ever be worth, a step that would benefit financial institutions at taxpayers’ expense.

Anyone who has tried to buy or sell a house when the market is falling, as it is now, knows how difficult it can be to agree on a price. But valuing the securities that the Treasury aims to buy will be far more difficult. Each one of these investments is tied to thousands of individual mortgages, and many of those loans are going bad as the housing market worsens.

Read it all.

President Bush appealed to the nation Wednesday night to support a $700 billion plan to avert a financial meltdown on Wall Street, and he invited both major presidential candidates to join him and Congressional leaders at the White House on Thursday to forge a bipartisan compromise.

Warning that “a long and painful recession” could occur if Congress does not act quickly, Mr. Bush said the consequences could play out in “a distressing scenario,” including potential bank failures, job losses and inability for ordinary Americans to borrow money to buy cars or send their children to college.

“Fellow citizens, we must not let this happen,” he said.

The address, and the extraordinary offer to bring together Senator Barack Obama, the Democratic presidential nominee, and Senator John McCain, the Republican, just weeks before the election underscored a growing sense of urgency on the part of the administration that Congress must act to avert a far-reaching economic collapse.

It was the first time in Mr. Bush’s presidency that he delivered a prime-time address devoted exclusively to the economy, and it came at a time when deep public unease about shaky financial markets has been coupled with skepticism and anger directed at a government bailout that would be the most expensive in American history.

Read it all.

Unfortunately, there were also some serious negative consequences, particularly in the housing market. Easy credit — combined with the faulty assumption that home values would continue to rise — led to excesses and bad decisions. Many mortgage lenders approved loans for borrowers without carefully examining their ability to pay. Many borrowers took out loans larger than they could afford, assuming that they could sell or refinance their homes at a higher price later on.

Optimism about housing values also led to a boom in home construction. Eventually the number of new houses exceeded the number of people willing to buy them. And with supply exceeding demand, housing prices fell. And this created a problem: Borrowers with adjustable rate mortgages who had been planning to sell or refinance their homes at a higher price were stuck with homes worth less than expected — along with mortgage payments they could not afford. As a result, many mortgage holders began to default.

These widespread defaults had effects far beyond the housing market. See, in today’s mortgage industry, home loans are often packaged together, and converted into financial products called “mortgage-backed securities.” These securities were sold to investors around the world. Many investors assumed these securities were trustworthy, and asked few questions about their actual value. Two of the leading purchasers of mortgage-backed securities were Fannie Mae and Freddie Mac. Because these companies were chartered by Congress, many believed they were guaranteed by the federal government. This allowed them to borrow enormous sums of money, fuel the market for questionable investments, and put our financial system at risk.

The decline in the housing market set off a domino effect across our economy. When home values declined, borrowers defaulted on their mortgages, and investors holding mortgage-backed securities began to incur serious losses. Before long, these securities became so unreliable that they were not being bought or sold. Investment banks such as Bear Stearns and Lehman Brothers found themselves saddled with large amounts of assets they could not sell. They ran out of the money needed to meet their immediate obligations. And they faced imminent collapse. Other banks found themselves in severe financial trouble. These banks began holding on to their money, and lending dried up, and the gears of the American financial system began grinding to a halt.

With the situation becoming more precarious by the day, I faced a choice: To step in with dramatic government action, or to stand back and allow the irresponsible actions of some to undermine the financial security of all.

Read it all.

Journalists like simple stories with clear-cut villains who are easy for readers (and journalists themselves) to recognize. And so, as the financial crisis has brought Wall Street to its knees in recent weeks, it’s become so much easier for journalists to cope. Time Magazine, for instance, tells us in its current issue that Wall Street “sold out” America, while the New York Times decries “Wall Street’s ”¦.real estate bender.” John McCain has helped out the scribes by attributing the problems we now face to greed on Wall Street.

Listening to this sort of chatter, it’s easy to forget that this mess began with a heap of bad mortgages made by American consumers who never came within a hundred miles of the card sharps on Wall Street. The inability (and in a good deal of cases, the unwillingness) of these same ordinary Americans to pay back these loans, many of which are sitting in mortgage backed-securities held by institutions around the world, helped tilt us toward this systemic threat to our financial system. And even as we focus on bad bets and lousy leverage ratios on Wall Street, these toxic mortgages continue to unwind, and as they do, we are getting a better look at how they were made””and it’s not pretty. If it wasn’t clear before, it should be now, that speculation and fraud””much of it on the part of borrowers””were rampant.

As I have observed before, mortgage fraud soared in the run-up to this mess, and believe it or not, it’s continuing to rise. The FBI says that reports of suspicious mortgage activity increased by 10-fold from 2001 through 2007, and rose another 42 percent in the first quarter of 2008.

As I continue to insist, this is only part of the story that has four parts, but it is a part which cannot be ignored. I am afraid in many more instances than people want to admit, the lender was so incentivized to make the mortgage that he or she did not present it to the would be borrower realistically and truthfully. Read it all–KSH

As Setser and Duy pointed out, we got a subsidy of $1000 a person from our friendly foreign funding sources. The bailout bill $700 billion figure (which could be larger, since that is the maximum outstanding at any one time; the real limit is the increase in the debt ceiling) amounts to $2000 a person. Will our creditors play ball and lend us the money? It isn’t at all clear that they will, at least at current interest rates. They have become decidedly cool on buying agency paper. The man on the street in Asia and Europe is taken aback by the events of the last two weeks. Funding the US has become controversial in China, and may be in other major lenders. And a rise in interest rates would considerably undermine the supposed benefits of the program.

The sorry fact is the US has consumed at an unsustainable level. We need to reduce consumption and increase savings (and reducing debt is a form of savings).

Read it all and especially take the time to look at the main useful charts.

The most obvious solution is to pay more than 25 cents on the dollar and then demand something in return for the premium ”” namely, a stake in any firm that participates in the bailout. Congressional Democrats have been pushing for such a provision this week, and it’s one of the most important things they have done.

The government would then be accomplishing three things at once. First, it would take possession of the bad assets now causing a panic on Wall Street. Second, it would inject cash into the financial system and help shore up firms’ balance sheets (which some economists think is actually a bigger problem than the bad assets). And, third, it would go a long way toward minimizing the ultimate cost to taxpayers.

Why? The more that the government overpays for the assets, the larger the subsidy it’s providing to Wall Street ”” and the more it is pushing up the share prices of Wall Street firms. As Senator Jack Reed, Democrat of Rhode Island, notes, the equity stakes allow the government to recapture some of the subsidy down the road. It’s a self-correcting mechanism.

Some details of a bailout will have to remain vague, in part so that Treasury officials have the flexibility to respond to an obviously fluid situation. But Congress can still do a lot this week to make sure the final cost is a lot closer to, say, $100 billion than $700 billion.

Read it all.

Whether or not tomorrow’s accounts of today’s turmoil prove David Owen of Dresdner Kleinwort right; whether or not this is the beginning of the end of the dollar’s pre-eminence in the world’s central banks and foreign exchanges, the economic landscape has undoubtedly changed forever.

The US taxpayer bail-out of America’s banking sector is an event whose significance will reverberate for many years. What it means for free markets, for the way Western economies are run, for the prosperity of the world economy, must remain to be seen.

But as investors scrambled to make sense of last week’s events, already one conclusion was all but irrefutable ”“ the US dollar will have to take another major fall.

Read it all.

With financial markets in flux and a massive government rescue package in the works, financial reporter and New York Times columnist Gretchen Morgenson looks into what’s involved in the nearly $700 billion deal.

One central concern: The way troubled banks’ assets get valued when the federal government buys them. “Depending on how [the bailout program] is operated, and how the assets are valued before taxpayers are forced to buy them, it could bloat our final bill for this mess while benefiting the very institutions that got us into it,” Morgenson wrote in a recent column.

Morgenson talks to Terry Gross about strategies the government might employ to value the assets taxpayers are buying from endangered institutions ”” and how regulators might earn back some of the trust they’ve lost in recent weeks.

Listen to it all from NPR.

1. You two gentlemen have been wrong about the Housing crisis, missed the leverage problem, and understated the derivative issue. Recall the overuse of the word “Contained.” Indeed, you two have been wrong about nearly everything financially related since this crisis began years ago.

Question: Why should we trust your judgment on the largest bailout in American history?

2. How are you pricing the purchase of these damaged assets? Is the taxpayer paying 22 cents on the dollar? 5.5 cents? If there is no market price for this junk paper, how are you going to determine a purchase price?

Read it carefully and read it all.

President Bush’s proposed solution, which he wants Congress to authorize immediately, tells taxpayers to write a check for $700 billion and trust the government and Wall Street to do the right thing ”” with inadequate regulation and virtually no oversight.

We agree with Senator Barack Obama that the administration’s plan lacks regulatory muscle, and we agree with Senator John McCain when he said: “When we’re talking about a trillion dollars of taxpayer money, ”˜trust me’ just isn’t good enough.”

Nearly everyone agrees that the there will have to be another very big bailout. The financial system, gorged on its own excesses, cannot stabilize without intervention. The $700 billion would be used to buy up the bad assets that are presumably clogging the system.

To protect the American taxpayer, Congress must ensure that the bailout comes with clear ground rules and vigilant oversight. In an appalling, though familiar fashion, the ground rules proposed by the Bush administration are wholly unacceptable ”” as are its tactics.

Read it all.

Most economists accept that the nation’s financial crisis ”” the worst since the Great Depression ”” has reached such perilous proportions that an expensive intervention is required. But considerable disagreement centers on how to go about it. The Treasury’s proposal for a bailout, now being negotiated with Congress, is being challenged as fundamentally deficient.

“At first it was, ”˜thank goodness the cavalry is coming,’ but what exactly is the cavalry going to do?” asked Douglas W. Elmendorf, a former Treasury and Federal Reserve Board economist, and now a fellow at the Brookings Institution in Washington. “What I worry about is that the Treasury has acted very quickly, without having the time to solicit enough opinions.”

The common denominator to many reactions is a visceral discomfort with giving Treasury Secretary Henry Paulson Jr. ”” himself a product of Wall Street ”” carte blanche to relieve major financial institutions of bad loans choking their balance sheets, all on the taxpayer’s bill.

There are substantive reasons for this discomfort, not least concerns that Mr. Paulson will pay too much, thus subsidizing giant financial institutions. Many economists argue that taxpayers ought to get more than avoidance of the apocalypse for their dollars: they ought to get an ownership stake in the companies on the receiving end.

Read it all.

The financial markets are in quite fragile condition and I think absent a plan they will get worse,” Bernanke said.

Ominously, he added, “I believe if the credit markets are not functioning, that jobs will be lost, that our credit rate will rise, more houses will be foreclosed upon, GDP will contract, that the economy will just not be able to recover in a normal, healthy way.”

GDP is a measure of growth, and a decline correlates with a recession.

Dodd later spoke disparagingly of the administration’s proposal. “What they have sent us is not acceptable,” he told reporters after presiding over a lengthy Senate Banking Committee hearing at which Bernanke and Treasury Secretary Henry Paulson urged swift action by Congress.

Read it all.

Inspired in part by Paul Volcker, Nicholas Brady and Eugene Ludwig, and announced last week, the Paulson plan is a pure establishment play. It would assign nearly unlimited authority to a small coterie of policy makers. It does not rely on any system of checks and balances, but on the wisdom and public spiritedness of those in charge. It offers succor to the investment banks that contributed to this mess and will burn through large piles of taxpayer money. But in exchange, it promises to restore confidence. Somebody, amid all the turmoil, will occupy the commanding heights. Somebody will have the power to absorb debt and establish stability.

Liberals and conservatives generally dislike the plan. William Greider of The Nation writes: “If Wall Street gets away with this, it will represent an historic swindle of the American public ”” all sugar for the villains, lasting pain and damage for the victims.”

He approvingly quotes the conservative economist Christopher Whalen of Institutional Risk Analytics: “The joyous reception from Congressional Democrats to Paulson’s latest massive bailout proposal smells an awful lot like yet another corporatist love fest between Washington’s one-party government and the Sell Side investment banks.”

Thanks to their criticism, the plan will be pinned back. Oversight will be put in place. But the plan will probably not be stopped. The markets would tank. There is a hunger for stability, which only the Treasury and the Fed can provide.

So we have arrived at one of those moments. The global financial turmoil has pulled nearly everybody out of their normal ideological categories. The pressure of reality has compelled new thinking about the relationship between government and the economy. And lo and behold, a new center and a new establishment is emerging.

Read it all.

As we’ve worked through this period of market turmoil, we have acted on a case-by-case basis ”” addressing problems at Fannie Mae and Freddie Mac, working with market participants to prepare for the failure of Lehman Brothers, and lending to A.I.G. so it can sell some of its assets in an orderly manner. We have also taken a number of powerful tactical steps to increase confidence in the system, including a temporary guaranty program for the U.S. money market mutual fund industry. These steps have been necessary but not sufficient.

More is needed. We saw market turmoil reach a new level last week, and spill over into the rest of the economy. We must now take further, decisive action to fundamentally and comprehensively address the root cause of this turmoil.

And that root cause is the housing correction which has resulted in illiquid mortgage-related assets that are choking off the flow of credit which is so vitally important to our economy. We must address this underlying problem, and restore confidence in our financial markets and financial institutions so they can perform their mission of supporting future prosperity and growth.

We have proposed a program to remove troubled assets from the system. This troubled asset relief program has to be properly designed for immediate implementation and be sufficiently large to have maximum impact and restore market confidence. It must also protect the taxpayer to the maximum extent possible, and include provisions that ensure transparency and oversight while also ensuring the program can be implemented quickly and run effectively.

The market turmoil we are experiencing today poses great risk to U.S. taxpayers. When the financial system doesn’t work as it should, Americans’ personal savings, and the ability of consumers and businesses to finance spending, investment and job creation are threatened.

The ultimate taxpayer protection will be the market stability provided as we remove the troubled assets from our financial system. I am convinced that this bold approach will cost American families far less than the alternative a continuing series of financial institution failures and frozen credit markets unable to fund everyday needs and economic expansion.

Read it all.

Here’s a core problem with the Paulson-Bernanke $700 bailout: Once the new rules of the financial system are set, a bunch of very smart people will get paid a ton of money by hedge funds and the like to game that system. It would be the height of naivety to believe that regulators can write a system that can’t be gamed.

Read it all.

With that many pols at the helm, it’s no wonder that most analysts have portrayed Fannie and Freddie as if they were unregulated renegades, and rarely mentioned HUD in the ongoing finger-pointing exercise that has ranged, appropriately enough, from Wall Street to Alan Greenspan. But the near-collapse of these dual pillars in recent weeks is rooted in the HUD junkyard, where every [Andrew] Cuomo decision discussed here was later ratified by his Bush successors.

And that’s not an accident: Perhaps the only domestic issue George Bush and Bill Clinton were in complete agreement about was maximizing home ownership, each trying to lay claim to a record percentage of homeowners, and both describing their efforts as a boon to blacks and Hispanics. HUD, Fannie, and Freddie were their instruments, and, as is now apparent, the more unsavory the means, the greater the growth. But, as Paul Krugman noted in the Times recently, “homeownership isn’t for everyone,” adding that as many as 10 million of the new buyers are stuck now with negative home equity””meaning that with falling house prices, their mortgages exceed the value of their homes. So many others have gone through foreclosure that there’s been a net loss in home ownership since 1998.

It is also worth remembering that the motive for this bipartisan ownership expansion probably had more to do with the legion of lobbyists working for lenders, brokers, and Wall Street than an effort to walk in MLK’s footsteps. Each mortgage was a commodity that could be sold again and again””from the brokers to the bankers to the securities market. If, at the bottom of this pyramid, the borrower collapsed under the weight of his mortgage’s impossible terms, the home could be repackaged a second or a third time and either refinanced or dumped on a new victim.

Those are the interests that surrounded Cuomo, who did more to set these forces of unregulated expansion in motion than any other secretary and then boasted about it, presenting his initiatives as crusades for racial and social justice.

Read it all.

The Federal Reserve took a number of actions to increase liquidity and stabilize markets. Notably, to address dollar funding pressures worldwide, we announced a significant expansion of reciprocal currency arrangements with foreign central banks, including an approximate doubling of the existing swap lines with the European Central Bank and the Swiss National Bank and the authorization of new swap facilities with the Bank of Japan, the Bank of England, and the Bank of Canada. We will continue to work closely with colleagues at other central banks to address ongoing liquidity pressures. The Federal Reserve also announced initiatives to assist money market mutual funds facing heavy redemptions and to increase liquidity in short-term credit markets.

Despite the efforts of the Federal Reserve, the Treasury, and other agencies, global financial markets remain under extraordinary stress. Action by the Congress is urgently required to stabilize the situation and avert what otherwise could be very serious consequences for our financial markets and for our economy. In this regard, the Federal Reserve supports the Treasury’s proposal to buy illiquid assets from financial institutions. Purchasing impaired assets will create liquidity and promote price discovery in the markets for these assets, while reducing investor uncertainty about the current value and prospects of financial institutions. More generally, removing these assets from institutions’ balance sheets will help to restore confidence in our financial markets and enable banks and other institutions to raise capital and to expand credit to support economic growth.

At this juncture, in light of the fast-moving developments in financial markets, it is essential to deal with the crisis at hand.

Read it carefully and read it all.

A friend serving in the Bush administration called Sunday to try to talk me out of my doubts about the $700 billion financial bailout the administration was asking Congress to approve. I picked up the phone, and made the mistake of good-naturedly remarking, in my best imitation of Oliver Hardy, “Well, this is a fine mess you’ve gotten us into.”

People who’ve been working 18-hour days trying to avert a meltdown are entitled to bristle at jocular comments from those of us not in public office. So he bristled. He then tried to persuade me that the only responsible course of action was to support the administration’s request.

I’m not convinced.

Read it all.

Back in 2002, when his reputation as “The Man Who Saved the World” was at its peak, Alan Greenspan, former chairman of the Federal Reserve, came to Britain to pick up his knighthood. His biggest fan, Gordon Brown, now the UK prime minister, had ensured that the citation said it was being awarded for promoting “economic stability”.

During his trip, Mr Greenspan visited the Bank of England’s monetary policy committee. He told them the US financial system had been resilient amid the bursting of the internet bubble. Share prices had halved and there had been massive bond defaults, but no big bank collapses. Mr Greenspan lauded the fact that risk had been spread, using complex derivative instruments. One of the MPC members asked: how could this be? Someone must have lost all that money; who was it? A look of quiet satisfaction came across Mr Greenspan’s face as he answered: “European insurance companies.”

Six years later, AIG, the largest US insurance company, has in effect been nationalised to stop it blowing up the financial world. The US has nationalised the core of its mortgage industry and the government has become the arbiter of which financial companies should survive or die.

Read it all.

A.I.G.’s financial statements provided a clue to the identities of some of its credit default swap counterparties. The company said that almost three-quarters of the $441 billion it had written on soured mortgage securities was bought by European banks. The banks bought the insurance to reduce the amounts of capital they were required by regulators to set aside to cover future losses.

Enjoy the absurdity: Billions in unregulated derivatives that were about to take down the insurance company that sold them were bought by banks to get around their regulatory capital requirements intended to rein in risk.

Got that?

Which brings us to Item 2 for policy makers. Stop pretending that the $62 trillion market for credit default swaps does not need regulatory oversight. Warren E. Buffett was not engaging in hyperbole when he called these things financial weapons of mass destruction.

“The last eight years have been about permitting derivatives to explode, knowing they were unregulated,” said Eric R. Dinallo, New York’s superintendent of insurance. “It’s about what the government chose not to regulate, measured in dollars. And that is what shook the world.”

Read it all. I didn’t catch this piece until this morning, but please note once again the absolutely crucial role of the Credit Default Swaps market–KSH

Yes, greed is ever with us, at least until Washington transforms human nature. The wizards of Wall Street and London became ever more inventive in finding ways to sell mortgages and finance housing. Some of those peddling subprime loans were crooks, as were some of the borrowers who lied about their incomes. This is what happens in a credit bubble that becomes a societal mania.

But Washington is as deeply implicated in this meltdown as anyone on Wall Street or at Countrywide Financial. Going back decades, but especially in the past 15 or so years, our politicians have promoted housing and easy credit with a variety of subsidies and policies that helped to create and feed the mania. Let us take the roll of political cause and financial effect:

– The Federal Reserve. The original sin of this crisis was easy money. For too long this decade, especially from 2003 to 2005, the Fed held interest rates below the level of expected inflation, thus creating a vast subsidy for debt that both households and financial firms exploited. The housing bubble was a result, along with its financial counterparts, the subprime loan and the mortgage SIV.

Fed Chairmen Alan Greenspan and Ben Bernanke prefer to blame “a global savings glut” that began when the Cold War ended. But Communism was dead for more than a decade before the housing mania took off. The savings glut was in large part a creation of the Fed, which flooded the world with too many dollars that often found their way back into housing markets in the U.S., the U.K. and elsewhere.

Read the whole article.

We’ve looked at the [Housing] bubble question and we’ve concluded that it is most unlikely.

—Alan Greenspan, July 2002

It’s a rare day when finance officials, leftist intellectuals and ordinary salespeople can agree on something. But the economic meltdown that wrought its wrath from Rome to Madrid to Berlin this week brought Europeans together in a harsh chorus of condemnation of the excess and disarray on Wall Street.

The finance minister of Italy’s conservative and pro-U.S. government warned of nothing less than a systemic breakdown. Giulio Tremonti excoriated the “voracious selfishness” of speculators and “stupid sluggishness” of regulators. And he singled out Alan Greenspan, the former chairman of the U.S. Federal Reserve, with startling scorn.

“Greenspan was considered a master,” Tremonti declared. “Now we must ask ourselves whether he is not, after [Osama] bin Laden, the man who hurt America the most. . . . It is clear that what is happening is a disease. It is not the failure of a bank, but the failure of a system. Until a few days ago, very few were willing to realize the intensity and the dramatic nature of the crisis.”

Read it all.

The financial crisis that began in the United States spread to many corners of the globe. Now, the American bailout looks as if it is going global, too, a move that could raise its cost and intensify scrutiny by Congress and critics.

Foreign banks, which were initially excluded from the plan, lobbied successfully over the weekend to be able to sell the toxic American mortgage debt owned by their American units to the Treasury, getting the same treatment as United States banks.

On Sunday, the Treasury secretary, Henry M. Paulson Jr., indicated in a series of appearances on morning talk shows that an original proposal introduced on Saturday had been widened. “It’s a distinction without a difference whether it’s a foreign or a U.S. one,” he said in an interview with Fox News.

Read it all.

MR. BROKAW: The market did go up a record amount. Since 1987 it went up more than 600 points in two days. But that really is a false positive sign, as they would say in laboratory testing, isn’t it?

SEC’Y PAULSON: Yeah, I, I would say this. It’s not what we should be looking at. It is not what we should be looking at. The stock market going up and down is not what we should be looking at. We need to look at what’s going on in the credit markets, and they are still very fragile right now and frozen. And we need to do something to deal with this and deal with it quickly.

MR. BROKAW: There is a big political debate about whether, whether the fundamentals of the American economy are strong or not. Is it fair to say that the fundamentals of the American economy may not be strong, but, in fact, they’re staggering at the moment?

SEC’Y PAULSON: Well, what I should say is, I won’t bet against the American people. We’re an entrepreneurial people, a hard-working people, and we will work through this, we always do. I wouldn’t bet against the American people, and I wouldn’t bet against the long-term fundamentalists of this country. But this is a humbling experience to see so much fragility in our capital markets and to ask how did we ever get here.

Read it all. I enjoyed the interview with Mayor Michael Bloomberg also.

The market was 500 trades away from Armageddon on Thursday, traders inside two large custodial banks tell The Post.

Had the Treasury and Fed not quickly stepped into the fray that morning with a quick $105 billion injection of liquidity, the Dow could have collapsed to the 8,300-level – a 22 percent decline! – while the clang of the opening bell was still echoing around the cavernous exchange floor.

According to traders, who spoke on the condition of anonymity, money market funds were inundated with $500 billion in sell orders prior to the opening. The total money-market capitalization was roughly $4 trillion that morning.

The panicked selling was directly linked to the seizing up of the credit markets – including a $52 billion constriction in commercial paper – and the rumors of additional money market funds “breaking the buck,” or dropping below $1 net asset value.

Read it all.

Of all the points raised by different analysts about the economy last week, surely the best was Representative Barney Frank’s reminder on “Charlie Rose” that Ronald Reagan’s favorite laugh line was telling audiences that: “The nine most terrifying words in the English language are: ”˜I’m from the government, and I’m here to help.’ ”

Hah, hah, hah.

Are you still laughing? If it weren’t for the government bailing out Fannie Mae, Freddie Mac and A.I.G., and rescuing people from Hurricane Ike and pumping tons of liquidity into the banking system, our economy would be a shambles. How would you like to hear the line today: “I’m from the government, and I can’t do a darn thing for you.”

In this age of globalization, government matters more than ever….

Those are the kind of words that would get my attention. The last president who challenged his base was Bill Clinton, when he reformed welfare and created a budget surplus with a fair and equitable tax program. George W. Bush never once ”” not one time ”” challenged Americans to do anything hard, let alone great. The next president is not going to have that luxury. He will have to ask everyone to do something hard ”” and I want to know now who is up to that task.

Read it all.

Bipartisan support appeared to be emerging Sunday among American lawmakers to give quick approval to a vast bailout of financial institutions.

The Bush administration has proposed granting unfettered authority for the Treasury Department to buy up to $700 billion in distressed mortgage-related assets from private firms as part of a program that Treasury Secretary Henry M. Paulson Jr. said “has to work.”

“I hate the fact that we have to do it, but it’s better than the alternative,” Mr. Paulson said on “Fox News Sunday.” “This is a humbling, humbling time for the United States of America.”

The proposal, presented on Saturday, would raise the national debt ceiling to $11.3 trillion and would place no restrictions on the administration other than requiring semiannual reports to Congress while allowing the Treasury secretary unprecedented power to buy and resell mortgage debt.

With some estimates that the program could involve the purchase of as much as $1 trillion in assets from private firms, Mr. Paulson emphasized that the true cost would be “determined by how quickly the economy recovers and how quickly housing prices stabilize.”

Read it all.

And that really is the crux of the matter ”” the financial system has seized up. But so far, the government’s actions haven’t helped. Letting Lehman go bust may have sounded good at the time, but it has had disastrous consequences.

It has led to complete chaos in the multitrillion-dollar market for credit-default swaps and was a crucial reason Morgan Stanley was forced to scramble to stay alive this week. It is also why questions were raised about the viability of Goldman Sachs, a firm with a pristine balance sheet and almost none of the bad assets that are bringing down other firms.

The rescue of A.I.G. further undermined confidence because, within the space of several days, the government did a complete about-face. The bailout suggested the Treasury Department was as confused about what to do as the rest of us.

So rather than help solve the crisis, the Treasury Department has actually contributed to the biggest problem in the market right now: an utter lack of confidence.

Nobody understands who owes what to whom ”” or whether they have the ability to pay. Counterparties have become afraid to trade with each other. Sovereign wealth funds are no longer willing to supply badly needed capital because they no longer know what they are investing in. The crisis continues because nobody knows what anything is worth. You simply cannot have a functioning market under such circumstances.

Will this latest round of proposals end the crisis? I know the stock market reacted joyously on Friday, but I’m not hopeful….

Read it all.