Is There a Financial Crisis?

NYT Pulitzer Prize-winning journalist David Cay Johnston, author of Free Lunch: How the Wealthiest Americans Enrich Themselves at Government Expense (and Stick You with the Bill), points a dagger at Paulson's plunder:

Ask this question -- are the credit markets really about to seize up?

If they are then lots of business owners should be eager to tell how their bank is calling their 90-day revolving loans, rejecting new loans and demanding more cash on deposit. I called businessmen I know yesterday and not one of them reported such problems. Indeed, Citibank offered yesterday to lend me tens of thousands of dollars on my signature at 2.99 percent, well below the nearly 5 percent inflation rate. That offer came after I said no last week to a 4.99 percent loan.

If the problem is toxic mortgages then how come they are still being offered all over the Internet? On the main page AOL generates for me there is an ad for a 1.9% loan (which means you pay that interest rate and the rest of the interest is added to your balance due.) Why oh why or why would taxpayers be bailing out banks that are continuing to sell these toxic loans?

Henry Blodget brings some sanity to his analysis:

First, until the banks are on death's door, they'll use any government largesse for their own gain: Specifically, they'll only sell assets they think the government is overpaying for (otherwise, why would they sell them)? And the banks know far better than the government will what their own assets are worth.

Just cleaning up the banks' mistakes will not make them start aggressively lending again. Yes, it's the first part of the process, but contrary to Paulson's assertions this morning, cleaning up bank balance sheets will not quickly fix the housing market. The trouble in the housing market, remember, is that millions of houses were bought by people who couldn't afford them. These folks still can't afford the houses, with or without loans (and especially now that the economy is cratering). So merely making the banks able to lend again won't suddenly soak up all the excess housing inventory...

The government has already headed off the immediate crisis by announcing that it intends to help. Now, it should use that assurance to play more of a backstop-of-last-resort sort of a role, where it only helps companies that are truly in trouble and gets a significant equity stake for doing so. Anything less will bail out idiot banks and their shareholders at the expense of taxpayers.

Meanwhile Warren Buffett proves how absurd the Paulson Plunder is by getting real value for his bailout:

The billionaire Warren E. Buffett will invest $5 billion in the investment bank Goldman Sachs, as part of the bank's efforts to raise $7.5 billion in fresh capital, a Goldman spokesman, Lucas Van Praag, said Tuesday.

In return, Berkshire Hathaway, the conglomerate run by Mr. Buffett, will receive perpetual preferred shares in Goldman, Mr. Praag said. The preferred stock will pay a 10 percent dividend.

CalculatedRisk appears to measure the health of credit markets using the TED Spread:

the TED spread is the difference between the three month T-bill and the LIBOR [London Interbank] interest rate. Usually the TED spread is less than 0.5%. The higher the spread, the greater the perceived credit risks (compared to "risk free" treasuries).

CR says we're in "credit hell" because the spread hit 3.02% yesterday. But that is lower than the peak a week ago, and the (financial) world didn't end then.

NakedCapitalism writes:

The bank funding market continues to be under stress. To some degree, this was anticipated, as various market participants saw signs that the year-end liquidity squeeze, and the months preceding it, would be worse than last year, which was bad enough to lead to the creation of the first special liquidity vehicle, the Term Auction Facility [TAF].

Note that if central banks, who have the greatest ability to influence short term rates and money market conditions, cannot do so via their routine liquidity measures and the new alphabet soup of Fed facilities, it is it clear that the Paulson bailout plan will have any more success. The immediate remedy would be to increase the size of the TAF.