I don't think Chrysler is viable. The best we can hope for is that they can sell some of their stronger brands and shut down the remainder of the company cleanly. GM, because of their large dealer network, is a much stickier problem. Current state law requires GM to buy out the dealer if it can no longer provide them cars. This makes eliminating brands like Saturn very expensive. Ford is in the best shape relatively speaking. It has cash and credit lines to keep running until the end of 2009 by which time the market will have improved or one of its competitors will be out of business.

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The combination of rising mortgage interest rates and worries about unemployment will continue to weigh on the housing market. With more price declines next year, expect more foreclosures and more losses at banks and at Fannie Mae and Freddie Mac. The Obama team should plan for another bigger bailout next year when the current bailout proves ineffective.

The G-7 finance ministers met and released a statement promising coordinated global inaction to deal with the credit crisis. Fortunately, the crisis is about to play itself out soon. Credit markets will begin to reopen; stocks will stabilize. People who have been frantically doing things will take credit for the calm. Of course, the real economy is about to get much worse but it will be much less visible than the stock ticker, so politicians will get back to the more sedate bickering about which brand of snake oil to give to the patient. There are remedies that are clearly called for but we are most likely going to get all the old pet causes (unemployment insurance, capital gains tax cut) dressed up as solutions for the new illness.

The Treasury is considering buying preferred shares in U.S. banks in a style similar to the United Kingdom's bank plan. But don't call it partial nationalization, because that's what it is. Besides being ideologically unsound, it won't by itself fix the current crisis.

The key problem at the moment is the snarled Credit Default Swaps. Part of the problem will be resolved when the Lehman Brother CDS are settled tomorrow. But I am sure that many parties are reconsidering the risk they took on when they sold credit default swaps to companies formerly rated very secure. The government should sell credit default swaps to companies that can prove they have a net short position in CDS, but covering no more than 80% of the net short position and of course at current market prices. This could be very profitable for the government if the company the CDS covers does not go bankrupt. And it would free up more capital due to the leverage involved in the swap.

It is times like this that you appreciate the fractional reserve banking system in the electronic age. If the U.S. was on the gold (or other hard money) standard, then the current crisis would have been much worse. Some argue that there would be no crisis if we were on a hard money standard, but that argument overlooks the evidence  from history. The U.S. was on the silver standard during the 1929 crash and the 1932 banking crisis; England was on the gold standard duiring the South Sea bubble, etc. Bubbles occur because  people emulate the behavior of the people arround them.

Now that we are in a panic, Money Velocity (the average number of hands a unit of money passes through in a given period) is  dropping. This requires the money supply to expand enormously in order to support the same level of economic activity. Fortunately, a computerized banking system means the Federal Reserve can create unbelievable amounts of money. But so far it has only been willing to do so much.

The Commercial Paper Funding Facility is a big step forward that should allow companies to meet their short term funding needs until banks and markets return to their more normal in providing credit to the real economy.

<br /> State   Democrat 	D-pct Republican  	R-pct  	Start  	 End  	 Pollster<br />Georgia Jim Martin 	44%   Saxby Chambliss* 	46% 	Sep 28 	Sep 29 	SurveyUSA<br />

The idea of a democrat defeating Chamblis given the edge in money that the incumbent has seems preposterous in a heavily Republican leaning state. But if you're sitting in a line at an Atlanta gas station hoping to get enough gas to go to work, you might think "This country is going in the wrong direction." You might even be angry enough to vote against the incumbent. If the Democrats can win a state-wide election for Senate, then they may be able to repeat that in a state wide race for governor.

Vernon Jones, who came in second in the Democratic primary, might be in the race for the nomination in two years. Or more intriguing, Labor Commissioner Michael Thurmond may run and he has already won some state-wide races, having been re-elected as Labor Commissioner several times.

It is an article of faith for economists that government can and should prevent economic crisis. It has to be an article of faith because there is no evidence that the belief is true. While it is known that governments can destroy a flourishing economy, the process of restarting a stalled economy is shrouded in superstition and conjecture. A gardener may plow, feed and fertilize but it is up to the seed to sprout. Sometimes it does without any care and sometime it doesn't despite great efforts.

Prosperity is build on a web of relationships. Businesses learn to trust their suppliers as they convince their customer to trust them. Banks trust their borrowers and become trusted by savers. Government can encourage and reinforce these relationships, but when an event comes along to bat away this trust as a man might treat a cobweb, then there is little government can do. No laws can compel co-operation; no amount of money can replace that willing suspension of disbelief that is at the heart of all economic bubbles.

Government, at times like these, must learn to be humble. Better to promise little and deliver than to paint utopia and add to the disillusionment. When government begin to rebuild trust, they must first regain the trust of the governed. The vote in the House shows that we are currently far from that ideal.

But a good day for democracy. Republicans have finally left behind the insane Bush borrow and spend era. The Paulson price tag failed for the simple reason that the Bush administration couldn't explain how it would help the situation to even financially literate people, much less to the general public and the financially illiterate Congress.

The situation is serious but it requires considered action rather than shotgun scatter shots of money. Unfortunately, we will have to wait for the next administration before anything like progress can occur and I expect the first attempts will be off the mark. More than a trillion dollars of market capitialization was lost today. But it's only money.

There will be panic. People will loses jobs. But America will survive.

Bail out is the term that gets thrown around but it is a very unsatisfactory term to use.

In Bear Sterns, the bond holders were bailed-out but the stock holders were wiped out.

For Fannie Mae, Freddie Mac and Washington Mutual, the Bush Doctrine comes to the financial system. All three were seized before they were insolvent. Fannie Mae and Freddie Mac senior and subordinated debt was made whole but preferred and common stockholder where left hanging.
Only depositors were protected in the Washington Mutual case.

And for Lehman Brothers, nobody was protected.

The problem for the financial markets is that no one knows the rules. No one knows what a safe investment. Money markets were thought safe but the Lehman bankruptcy proved that idea wrong.

$700 billion may or may not help. What the markets need is certainty about how the government will behave. It is unlikely to get it while politicians and bureaucrats are rushing around making an exception here, banning short selling here, and throwing in the occasional game of chicken between different parts of the government.

The sky is falling! The sky is falling! Oh, wait. It's just raining. But give us the money anyway, we might need it to leave the country and buy a refuge on a tropical island where the population does not question its leaders.

The problem is serious but Congress should not just give a ton of money to the Treasury department with out an explanation of how it will be used. I think that Bershire Hathaway's investment in Goldman Saks shows that markets still work without nationalizing the banking system.

I do not usually interfere with a medic while he is in the middle of saving a patient but I would like to point out one flaw in the mega-bailout plan
that is being presented to congress. Before you give a transfusion, you should stop the bleeding. Buying bad mortgages may help for now, but in six months there will be more bad mortgages, and in a year there will be even more bad mortgages. Nothing in the plan will prevent more and more people from being foreclosed on which will only drive house prices lower resulting in more foreclosures.

This plan is a bailout for financial firms without helping the real economy that those firms depend on. And because of the large debt the U.S. government is taking on the risk of inflation becoming embedded will increase. Wall Street is looking to Washington for leadership but instead it is getting the same sort of financial engineering that got us in this mess in the first place.

Lehman Brothers investment bank faces liquidation after emergency talks could not put together a deal to sell the investment bank to either Bank of America or Barclay's Bank. The big sticking point what the large commercial real estate portfolio which could include some significant losses. With the U.S. Treasury unwilling to use taxpayers money to assist the purchase, no one wanted to provide the capital to backstop the real estate portfolio.

This may result in a large drop in the equity markets once they reopen. No one knows what the consequences of a liquidation on this scale. Be prepared for a surprise rate cut this week to try to restore order to the market. Where the equity markets will be after such a whipsaw is anybody's guess but in the medium term it will go lower.