I have spent some time looking at interest rate data for the last year. Here is a summary of what I have found.

(1) I was slightly mistaken in my posting here on Wednesday that the 3-month LIBOR had hardly moved. Compared to a week earlier, it had moved up by about half a percentage point. However, that still is nothing like the huge increase in the overnight LIBOR. I have not changed my opinion that there is no evidence that the inter-bank market as a whole is frozen. Something does seem to be going on in the overnight market.

(2) Most short rates are up compared to where they were three months ago but are below their highs within the last 52 weeks. Literally every one of the 12 interest rates shown on the Wall Street Journal's Market Data Center web page, which includes several long rates, is now substantially below its 52-week high. The long rates are only slightly above their values of a week ago. Thus short-term credit has tightened compared to early July and even compared to last week but has loosened compared to some time between last July and last October. Long-term credit does not seem to have tightened noticeably. None of this is consistent with there being a credit "crisis."

(3) Mortgage rates are lower now than they were three months ago, which in turn were lower than the high between July and the previous October.

(4) Even the Treasury security rates tell a different story than what we read in the press reports. It is true that very short Treasury rates are lower than they have been at any time in the last year. However, rates for securities of maturity over about 1 year are higher than they were last March.

All of this suggests that there is no crisis or overall loss of faith in the credit market. There does seem to be a very short-term flight to security, as shown by the big drop in very short Treasury yields and the large increase in the overnight LIBOR. Otherwise, nothing about the credit markets seems especially alarming or even much out of the ordinary. To me, the interest rate patterns suggest short-term speculation about what the solons in Congress will do rather than long-term concern about market stability or safety.

The main "crisis" concerning the financial markets seems to be in the quality of the news reports about them.

My reading of the financial market is that there is no financial crisis and we don't need a bailout.

We are told we need this bill because of the financial crisis that grips the credit markets. What financial crisis? I don't see any evidence of a crisis. Consider what has happened. Several financial institutions have been bought by other financial institutions with little or no disruption in services provided. We are told that means we have a crisis. We do? If there is no disruption, only a change in ownership, why is there a crisis? AIG had liabilities that came due sooner than it could liquidate its assets, so it needed some cash. It got it from the Fed, in a "bridge loan." Where's the problem?

Presumably, the so-called "toxic assets" are causing difficulty because part of them is based on bad mortgages. The bad mortgages are a small part of all active mortgages, and mortgages are only a fraction of total US wealth. It may be that the market is having trouble pricing the complicated "toxic" assets right now, but those assets are worth a lot more than zero. The market will figure it out. Why the rush to bail out the firms that will take some losses because of the relatively small bad mortgages? The stock market tanked on Monday when the bailout was defeated in the House, but then it gained back most of the loss the next day. It ended up about where it was a week before and above where it had been the week before that. Markets fluctuate. What of it? The press has gone nuts over the large increase in the overnight LIBOR. We are told that credit markets are freezing, firms will not be able to get working capital, economic activity will come to a screeching halt, etc. In fact, LIBOR applies to inter-bank loans, not to loans to firms for working capital. According to this morning's Wall Street Journal, yesterday's interest rates (other than overnight LIBOR) had hardly moved from the levels they have been at for several months. Where is the evidence of a credit market freeze or any problem with firms getting working capital? Even the evidence for an inter-bank credit market freeze is limited. Yes, the overnight LIBOR went from 2% to 7%, but the three-month LIBOR moved by only a few basis points. If all we are talking about is the possibility that for the next week or so banks will have trouble borrowing from other banks, then there isn't a problem because the Fed stands ready to make short-term emergency loans through the Discount Window. Finally, I am having no trouble using my credit card.

As far as I can see, all the evidence is that the market is doing a fine job handling everything that recent events have thrown at it. Weak institutions have been absorbed, credit markets other than the overnight inter-bank market seem to be unfazed, and the existing government institutions have performed their intended function. So, just what is all the fuss about?

If I have missed something important, I would much appreciate someone pointing it out.

A related thought is that this talk of a financial crisis seems to me to be a lot of mindless, ignorant hysteria. Maybe that's just what the politicians want - hysteria and fear give them leeway to pass all kinds of damaging garbage. As I write this, the Senate has not yet voted on the bailout but has added lots of garbage to the bill that failed Monday. I just read that the Senate has added a provision requiring insurance companies to cover mental illness. Somehow, insuring mental illness doesn't seem closely related to an imminent credit freeze, but it is just the kind of thing that one would expect our illustrious politicians to sneak through amidst a panic that they themselves have had a hand in creating.

Today (er, actually this evening) will be a good day (good evening, too) in the Senate. They will pass a bailout bill which might just be an improvement on what failed on Monday. Should be a big vote. Good chance that this time, the House will also pass it.

Take THAT, Nancy*!

Watch for an announcement, probably by Sens. Dodd & Gregg with details, about an amendment Dodd will offer which contains the revised "Rescue" plan.

Questions:

Will the House Blue Dogs defect because the Senate did not "pay for" the tax extenders (because of Senate Republican pressure).

Who will remember that the increase in FDIC's insurance was originally proposed by Boehner & Blunt? (Inside Congress, anyway.)

Will Speaker Pelosi yield to those in her caucus who want to put some extra crap back into the sandwich**?

What follows in excerpted from an email circulating among bipartisan leadership staff with regard to the Senate schedule:

"Tomorrow, the Senate will take up the Rescue Package with a bump up in FDIC limits attached the tax extenders....They proceed as below:

The next series of stacked roll call votes will occur at 7:30 p.m. on Wednesday Oct. 1st. There will be up to 6 roll call votes on the following items:

(1)Motion to concur on the House message, H.R. 2095, Rail Safety; (2)a Dorgan amendment relating to H.R. 7081, the U.S. - India Nuclear agreement; (3)a Bingaman amendment relating to H.R. 7081, the U.S. - India Nuclear agreement; (4)passage of H.R. 7081, the U.S. - India Nuclear agreement; (5)a Dodd amendment to H.R. 1424, relating to the bailout package; and (6)passage of H.R. 1424, the bailout."

While there may be some merit to further disclosure requirements by major players in the investment world, any new such rules must be carefully written and tightly constrained. Otherwise, we’ll over-regulate ourselves into staying in the hole. Worse yet, if some do climb out to put risk capital to work, they’ll be sued into submission and/or death by the plaintioffs bar which is already hard at work.

The forces who are pushing new rules are not fully disclosing their ultimate purposes nor are they listening to warning signs about unintended consequences. The current SEC chairman doesn’t deserve to be fired for not-being-tough enough, he needs to be encouraged to return to the middle position – enforce rules already on the books and stop proposing new ones in order to dictate an outcome.

Consider this ominous sentence in a Reuters story about a new proposal requiring a quantum leap in disclosures from hedge funds: "The SEC will keeps its information private for two weeks. After that, the information will be disclosed to the public on via online Edgar filing system."

Hmm, what's next disclosure of quant strategies? Trade secrets?

Is it time to put ankle bracelets on hedge fund traders? Metaphorically speaking, it appears so.

Who does Chris Cox think will be monitoring Edgar, ready to pounce, little old AARP ladies reviewing their portfolios or those vultures over at the plaintiffs bar.

Let’s peek at what the self-proclaimed “American Association for Justice” released just today attacking a business lobby for all the ills, no doubt setting the stage for a surge in class-action suits:

Today, U.S. Chamber has become the loudest voice supporting a government bailout, even though their previous actions and rhetoric have all demanded the opposite. And even in this bailout, U.S. Chamber has lobbied to include provisions that give complete immunity to those who have committed fraud, protect executive golden parachutes, and deprive families from protecting their mortgages through bankruptcy.

Plaintiffs' lawyers are everywhere it seems. John McCain's would-be substitute for Chris Cox sure had some helpful advice way back when:

Clinton's secretary of Housing and Urban Development, Andrew Cuomo, investigated Fannie Mae for racial discrimination and proposed that 50 percent of Fannie Mae's and Freddie Mac's portfolio be made up of loans to low- to moderate-income borrowers by the year 2001.

Posted by Donald L. Luskin at 7:51 AM | link  

Posted by Donald L. Luskin at 2:27 AM | link  

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