By Mike Whitney
29/09/08 “ICH” — – The wrangling continued on the floor of the House of Representatives all weekend, but it is still unclear whether there’s enough support to pass Treasury Secretary Paulson’s $700 billion Emergency Economic Stabilization Act of 2008. Paulson says he has the votes, but Paulson has been wrong before. The bigger question, is whether buying up the illiquid mortgage-backed assets from the nation’s banks will be enough to save the financial system from an impending meltdown. The jury is out on that question, too. Professor Nouriel Roubini, chairman of Roubini Global Economics, summed it up like this, “You’re not resolving the two fundamental issues: You still have to recapitalize the banking system, and household debt is going to stay high”. A large number of economists believe Roubini is right. The bill will not solve the underlying problems.
Still, senators and congressmen are expected to hold their noses and pass Paulson’s bailout anyway, fearing that if they don’t, the country’s financial system will come crashing down around them. They could be right, too. The banking system is undercapitalized, the credit markets are frozen, and foreign creditors are beginning to slow their purchases of US debt. It’s all bad. At the same time the number of casualties among the financial giants–Bear Stearns, Indymac, AIG, Lehman, Washington Mutual–continues to grow. Three more struggling European banks were added to the list of financial institutions that needed emergency government assistance this past weekend. It’s no wonder Congress feels like they have to do something to stop the bleeding.