Good Gracious: Interbank Lending Dries Up on Government Bailout Package Uncertainity

The reason for panic, the lockup in the commercial paper and interbank lending markets, led to Paulsen's $700 B asset purchase proposal.  I have, here, advocated direct relief for those markets, beyond what the Fed has already done.  But now we learn that the Paulsen/Bernanke proposal has made the interbank lending market worse, not better.  Uncertainty over asset purchase mechanics has led banks to hoard cash and refuse to lend to other banks.  Wonderful.

And it is not just interbank lending.  Gross, the very savvy manager at Pimco, said he was offered a six-month Morgan Stanley note at a yield of 25%, 25%, and he turned it down. There is too much uncertainty in the market "Where no one trust anybody: no one trusts any price."  By adding uncertainty to market prices with bailout negotiations, the Fed has heaped gasoline on a fire.