So we are now facing:

- a silent run on the huge mass of uninsured deposits of the banking system and even a run on some insured deposits are small depositors are scared;

- a run on most of the shadow banking system: over 300 non bank mortgage lenders are now bust; the SIVs and conduits are now all bust; the five major brokers dealers are now bust (Bear and Lehman) or still under severe stress even after they have been converted into banks (Merrill, Morgan, Goldman); a run on money market funds; a serious run on hedge funds; a looming refinancing crisis for private equity firms and LBOs);

- a run on the short term liabilities of the corporate sector as the commercial paper market has totally frozen (and experiencing a roll-off) while access to medium terms and long term financings for corporations is frozen at a time when hundreds of billions of dollars of maturing debts need to be rolled over;

- a total seizure of the interbank and money markets.

This is indeed a cardiac arrest for the shadow and non-shadow banking system and for the system of financing of the corporate sector. The shutdown of financing for the corporate system is particularly scary: solvent but illiquid corporations that cannot roll over their maturing debt may now face massive defaults due to this illiquidity. And if the financing of the corporate sectors shuts down and remains shut down the risk of an economic collapse similar to the Great Depression becomes highly likely.

http://tinyurl.com/43lehu

This could have been done by fixing the banks, which aren't in all that bad a shape. We already have mechanisms for dealing with bank problems.

The traditional role of banks has been displaced by non bank credit markets. Too late to put that genie back in the bottle, but you have to bail out the credit markets you have, not the credit markets you wish you had.

A real, retro, Keynesian moment. There is a general flight to safety, and everyone wants treasuries and not commercial paper. There is a "run" on these assets which are pretty good.

Consider the alternatives ... The government can either step in and backstop these markets or they can let them implode. As far as the cost is concerned, remember the cost of doing nothing, which results in significantly lower profits/taxes.

The government borrows low (from those that have to have treasuries) and lends somewhat higher. They can easily make money on this. When things stabilize, people will get tired of getting zero on short term treasuries and want back into the commercial paper market.

Whatever it takes not to blow things up.

Time to unlearn a couple of decades of free market ideology and start thinking like it was 1934. Markets are great and all, but left to their own devises, they don't always work that well, and it isn't the taxpayer that is being put at risk from action. The taxpayer is being put at risk by inaction which will result in economic contraction and lower tax revenues.

Time to dust off Keynes.

I have sympathy for those who are worried, and those who have lost savings.

But the debate so far has centered on financial markets and stability, failing to address what seems to me the core of the problem: an outmoded Constitution that concentrates almost limitless power in the executive branch, diminishing the ability of the government to govern.

The tragic flaw of the American form of government is that is it combines the offices of chief executive, command-in-chief and head of state. Checks and balances? Eroded over time, because they were never adequately shored up, by ideological appointments to the bench, and made irrelevant by the entrenchment of a 2 party system that treats legislators like sock-puppets.

Then, of course, there's the corrosive influence of money and influence-peddling.

And now America waits for a new President to fix a system that is, not just financially, but morally bankrupt. It'll be a long wait.

The rest of world, with its more flexible governing forms, multi-party systems and democratic-socialist safety nets, is better equipped to solve this crisis.

America must catch up, or be left behind. Constitutional reform is needed to create a genuine democracy: a multiparty system MUST be installed and the office of the presidency MUST be weakened.

In the meantime, America should go, cap in hand, to the IMF and ask for help. Now.

Otherwise, have genuine concern that the rest of the world will be obliged to dictate harsh terms to your new President in exchange for rescuing your economy. BRIC countries and Europe will demand a larger role in the IMF and World Bank, and you will be obliged to govern yourselves better. A three or four currency reserve system is coming. The USD will have to compete, and that will mean putting your fiscal house in order. No more seignorage, no more printing your way out of debt. If it can, the IMF will include anti-corruption measures to throw sand into the gears of your political machines.

It's time for America to grow up and join the ranks of civilized nations. The alternative is a long, slow decline into oligarchy, militarism and barbarism that imperils the safety of mankind.

To those Americans working for a multilateral world and an end to military adventurism, peace. To the rest, I say, America is no exception.

If you agree with me, plant a seed. Tell a friend.

"The Wednesday issue of the New York Times"...

Perhaps you meant Tuesday?

-Wil

...so we all get to be like the baby on the commercial who indulges in trading, then pukes...regardless of whether or not we choose to do so...

Just asking.

The real Wall St. Honchos are still getting theirs...

http://www.bloomberg.com/apps/news?pid=20601087&sid=azMWHW_FeFeY&refer=home

Ya gotta love it...

Does anyone doubt that the Bush extended crony family will leave the US in early 2009 with something like a few hundred billion dollars to set up shop in Dubai never to return to our shores again?

Mission, Accomplished.