According to The A.P.Thursday, in the Roosevelt Room after the session, the Treasury secretary, Henry M. Paulson Jr., literally bent down on one knee as he pleaded with Nancy Pelosi, the House Speaker, not to “blow it up” by withdrawing her party’s support for the package over what Ms. Pelosi derided as a Republican betrayal.
“I didn’t know you were Catholic,” Ms. Pelosi said, a wry reference to Mr. Paulson’s kneeling, according to someone who observed the exchange. She went on: “It’s not me blowing this up, it’s the Republicans.”
Mr. Paulson sighed. “I know. I know.”
Why all the fear? I think the London Banker’s idea is plausible. He says…
The Fed is very close to being illiquid. That is the fear factor we are seeing at work, and the reason no one will discuss why the bailout is needed – only emphasise the urgency.
The Fed can always print money on a grand scale. But if it does this, the international funding that the US needs will stop. Thus, the Fed is limited in a very real way. And it is burning through its current balance sheet at a terribly fast pace. As Brad Setser says…
In the last two weeks — if I am reading the Federal Reserves’ balance sheet data correctly — the Fed has:
Increased “other loans” to the financial system by around $230 billion (from $23.56b to $262.34b);
Increased its “other assets” by about $80b (from $98.67b to $183.89b);
Increased the securities it lends out to dealers by $60b (from $117.3b to $190.5b);
That works out to the provision of something like $370b of credit to the financial system in a two week period. That may be a bit too high: the outstanding stock of repos felll by $40b (from $126b to $ 86b), leaving a $330b net change in these line items. But that is still enormous.
He sums this all up by saying…
This is a very real crisis. The Fed’s balance tells a story of extraordinary stress. I never would have expected to see the Fed lend out these kinds of sums over such a short-period.
But the question remains, is taping the world’s already quite generous central banks for another 700 billion dollars in funding really an option? The assumption behind the Paulson plan is that will not raise the interest rates the Federal government has to pay. But this is a dubious hope.