Abject Terror of the Day

I'm a Kudlow optimist who is bullish on the long term prospects of the American economy. And I'm not quaking in my boots, selling stock, or loading up on water and ammunition.

But I have real concerns about the near term economy and am willing to suspend ideology if it means averting a liquidity crisis. There's no shortage of information or clever arguments for both sides. Here are four for mine, which is: the potential cost of doing nothing is too great, even a bad plan might calm markets; even the government will not lose the whole $700B; Secretary Paulson is as trustworthy to me as any of our 535 economists in chief, far more so than 532 of them.

1) Caterpillar’s 325 bps premium for financing over a similar loan just a few months ago. This is not Joe's Widgets, this is for CAT corporate debt.

2) Friend of a friend and long-time trusted commercial real estate developer is trying to refinance a $4 Million property and cannot get a loan of $900K.

3) A letter to Mankiw:

A LOT of payrolls get paid at the end of the month. The next for many companies is September 30. Three different people with hugely relevant knowledge said to me today words to the effect of: "Why don't your economist buddies want
[insert fortune 100 company/companies here] to be able to pay their employees on Tuesday. If Washington doesn't do something now, they won't be able to". That just scared the hell out of me. I can go into more details if you like, but all of them involve the four horsemen of the apocalypse.

4) Megan McArdle captures my sentiment:

Again, no one knows. Not $700 billion--that's the amount we're paying for distressed assets, some of which will yield profits. The entire portfolio of fire sale securities may lose money, but it's unlikely to be anything close to the entire amount.

In some sense, the reason to do the bailout is that we don't know. I don't want to give money to GM because I have a pretty good notion of the scale of a GM collapse. Some people will lose their jobs and get new ones, the steel industry will take a hit, and a lot of managers will be looking for another line of work than pushing ugly, underperforming cars. On the other hand, I have no idea how far a bank collapse might spread. And I'm really not eager to find out.

Me either. Give the bald guy the damn money.

Economics and Markets Posted by jk at September 26, 2008 12:40 PM