Developing Consensus

I'll try to get some links up on this today, but there's seems to be a developing consensus amongst economists that this bailout won't do what it is intended to do (surprise!) and that we are in for a pretty severe recession regardless of the what happens with the vote today.

The plan ignores (and complicates in some ways) the biggest problem in the credit markets, that is that banks and other financial institutions do not know how much exposure other banks have to the bad assets (MBSs, CDOs, CDSs, etc.) and therefore are not willing to lend to them. Any liquidity (cash/reserves) that they get (by selling assets, from the Federal Reserve, increased deposits) is being hoarded, and this just makes things worse for the entire financial system.

This plan cannot work because part of the current plan is to continue to allow banks to "mark-to-model" - that is keep assets on their books at made-up valuations. This is not going to encourage lending in the short-term credit markets.

A better plan would address this particular issue, because without guaranteeing short-term credit (or providing it directly from the Fed), there will be continuing problems with businesses securing the short-term debt they need to make payroll, pay their suppliers, pay their rent/lease/mortgages or to pay their long-term debtholders. This is how the crisis will impact the rest of the economy.