Tuesday, September 30, 2008

The US: "a banana republic with nukes"

So says Paul Krugman this morning after the US Congress rejected the $700 billion rescue plan.

He is quoting a warning he issued some days ago about what would happen unless Congress approved a plan. He says its coming to pass.

The entire world financial system will be dragged down (unless the Congress reconsiders and relents).

The Dow has suffered its biggest single points drop in history...

Here's Adam Carr at Australia's ICAP Securities this morning:

"As the expletives race around my mind - the jaw drops. By a vote of 228-205 the US House knocked back the rescue package – a variety of reasons were offered for the collapse - including that a speech made by one Democrat Representative was too partisan!? Republicans voted 2-1 against, while Democrats were generally in favour. Yet voters on both sides of the spectrum turned against the plan on concerns that it would merely be a Wall St bailout that ultimately wouldn’t work. A new vote can be held but the earliest I’m seeing is that would be later in the week with neither the House nor the Senate in session on Tuesday."

Here's Daniel Gross in the on-line magazine Slate:

"Well, maybe we don't need much of a private-sector financial system after all. That's the conclusion that most House Republicans, and a minority of House Democrats, seem to have reached in voting down the $700 billion bailout bill on Monday."

Read Michael West on this morning's Age and Herald website for a taste of what's now in store, and he didn't even like the rescue plan).

At a minute past midnight Australian Eastern Time the Australian Reserve Bank emailed me with the following:

"In response to continued strains in short-term funding markets, central banks today are announcing further co-ordinated actions to expand significantly the capacity to provide US dollar liquidity. Central banks will continue to work together closely and are prepared to take appropriate steps as needed to address funding pressures.

The Reserve Bank of Australia and the Federal Reserve have agreed on a US$20 billion expansion of the swap line to provide US dollar liquidity in Australia in exchange for Australian dollars. This is in addition to the US$10 billion swap line announced on 24 September 2008. The US dollars will again be made available against collateral to local market participants by the Reserve Bank via auction, and will be used to address year-end funding issues."

What was $10 billion has become $30 billion - all in order to make sure that the Australian companies wanting to enter forward foreign exchange contracts can actually get access to US dollars. Otherwise they almost certainly would not have been able to at any price.

Quarterly foreign exchange forward contracts are coming up for renewal. If they are unrenewable, trade will become more difficult - worldwide. Sand will be thrown into the wheels of the economic engine.