The world economy is on edge as it awaits the next round of American roulette. The US Senate has voted to create a $US700 billion ($880 billion) rescue vehicle for distressed debt. But the bill now goes to the House of Representatives, which has already rejected the idea once.
What will happen if the House says yes? And if it says no? What is the prize for winning this high-stakes game of chance? And the consequences of losing?
If you strip away the jargon, the core problem is pretty simple. There is an estimated $US2 trillion in dubious debt instruments, tied to the subprime mortgage market, outstanding at the moment. The US banks and institutions that hold them need to do one of two things – either sell them, or put a value on them in their financial statements.
At the moment, they can do neither. Why not? Because there is no functioning market. It’s not like the American sharemarket, where there are dedicated market-making firms that are charged with the job of standing in the market to buy shares, come what may.
When a purge is on any excuse will do.
“If we don’t do this, we may not have an economy on Monday.”
“either the authorities quickly act to unfreeze the banking system, or else the economy will slide into a black hole.” With stakes this high why are we playing the usual games with earmarks and pork.
“The whole aim of practical politics is to keep the populace alarmed–and hence, clamorous to be led to safety–by menacing it with an endless series of hobgoblins, all of them imaginary.” H.L. Mencken
And why is there no functioning market? There’s a market in bird guano. There’s a market in rusted iron.
I’ll give you a hint: There’s a market for guano and rust because there isn’t one huge buyer looming for all of the poop and rusting metal.
“Why is there no functioning market?”
This is a Minsky Moment, with liquidity disappearing just when you most need it. http://en.wikipedia.org/wiki/Minsky_moment