Crisis Reverberates in Credit, Stock Markets
U.S. Efforts to Aid Debt Arena Cause Unintended Upshots
online.wsj.com
The bailout: Hayek's revenge
Markets are bigger and more complex than any one set of regulators can comprehend, even Henry Paulson, as this WSJ story makes clear:
* Fannie/Freddie bonds are selling off because the bank guarantee is better, which of course undercuts the Fannie/Freddie rescue.
* The bailout increases government debt, also increasing interest rates, which makes mortgages harder to get, which was the problem that drove all this.
* Government backing for short-term debt pulled money away from corporations and European banks. . . .
* So the government had to loan directly to corporations and overseas banks with US branches. . .
* Which further increases government debt, further raising interest (including mortgage) rates, leading again back to square one.
* And increased bank deposit insurance may lure funds there, away from money market funds, which will then buy less short term debt, undercutting government relief of that market.
All this is well summarized by one person quoted in the article:
"You have unintended consequences that spark government actions, that create other unintended consequences," said David Kotok, chairman at money managers Cumberland Advisors.
Posted by Larry Ribstein on October 15, 2008 at 08:18 PM
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