The apparent collapse of negotiations last night over the Paulson bailout led to a lot of fears that we’d witness a financial market massacre this morning. As Paul Krugman put it at 9:34 p.m.:
I don’t even want to think about what tomorrow’s TED spread will look like.
The TED spread–for those of you who haven’t already learned to throw it about in everyday conversation–is the Official Financial Measure of the Panic of ’07 and ’08. It measures the interest-rate difference between three-month Treasuries and three-month Eurodollar LIBOR. LIBOR, the London Interbank Offered Rate, is what banks charge each other on short-term loans. It’s also what a lot of adjustable-rate mortgages are linked to. Anyway, if LIBOR’s a lot higher than the rate on Treasuries, it’s seen as a sign of financial distress. And here’s the thing: The TED spread, at 2.86 percentage points as of 10:45 a.m., is down so far today. Meanwhile, stocks opened down but not dramatically so.
What could this benign reaction possibly mean?
1) The stock market has been rising ever since President Bush declared this morning that “we are going to get a package passed.” So maybe it’s just that markets, in their infinite wisdom, remained pretty confident even after last night’s fireworks that something’s gonna happen. And now they’re even more confident.
2) The shrinking in the TED spread is simply the result of the Fed and other central banks pouring piles more cash into the banking system overnight, and doesn’t reflect a change in market sentiment at all.
3) Maybe we don’t need the bailout, at least not in the this-must-happen-tomorrow-or-we’ll-all-die sense of late last week. By acting to backstop money market mutual funds, and magically transforming the last two big investment banks standing–Goldman Sachs and Morgan Stanley–into banks, the government already addressed the two big panic button issues of last week. And now most all the remaining financial institutions that anybody might have serious worries about are within the banking system, where we have pretty well-established rules for dealing with insolvency and experienced civil servants who administer them. Not problem solved–nowhere near–but problem steered in a direction where it could conceivably be resolved without emergency legislation right now.
Update: Here’s Felix’s take. And Andrew Leonard–who, I feel strangely compelled to add, is Salon’s excellent business/economics blogger–makes a really good point:
[I]f the market goes into a nose dive in the last hour of trading today, the insta-analysis will take another wild swing.
Yeah, I’d have to say my writings stood up to the test of time a whole lot better when they were all committed in the pages of a magazine that only came out once every two weeks.
Update 2: The market ends the day on an upswing. My insta-analysis stands. Until Monday at least.