Since We've Established UberBailout Has Failed Miserably

...now what? I mean, we're pretty much out of options here short of an emergency Fed rate cut, and we're already down to 2%. Throwing money at the problem isn't working, because as I've said like seventeen times liquidity is not the problem, it's the symptom of the real problem, insolvency.

Dow's off 560 points as I write this at 1:45 PM or so. There is absolutely nothing that I'm seeing that will arrest the freefall of the stock markets and unlock the credit markets right now. The LIBOR, TED spreads, and Euribor are all through the roof. Banks are flat out terrified to lend to anybody right now, and that in turn is causing problems worldwide today.

The worst case scenarios are starting to play out...global systemic financial collapse. Again, a coordinated global rate cut may be the only thing left to play, because right now we have a number of countries trying to do their own thing when the problem is global right now. The response needs to be both global and powerful.

Right now it's a confidence problem, and nobody has any confidence anything's going to work.

What form will the next bailout take? We can't keep losing 500 points a day on the Dow for long. Roubini's theory is that today's tankfest is strictly because the markets were expecting that Helicopter Ben and Hammerin' Hank would have gotten the point from Friday's post bailout losses and would take massive, globally coordinated action. They have not...and thus, a 5-6% loss in markets across the board.

Since the crisis of confidence and liquidity was becoming more virulent over the last few days and during the weekend in Europe one would have expected a radical response over the weekend along the lines suggested above by the Fed and other central banks. After all Bernanke stated on Friday that the Fed would do whatever was necessary to deal with the liquidity crisis.

Instead the Fed did nothing over the weekend (before the crucial opening of markets in Asia and Europe) and then announced steps this morning that don’t even start to address the liquidity problems of the financial system: paying interest on reserves of banks only allows the Fed to provide more liquidity to banks (and only banks) while automatically sterilizing the effects of that liquidity support on base money; while doubling the size of the TAF (that only banks have access to) does nothing to address the run on the liquid liabilities of non-bank and the corporate sector. Also the liquidity support of banks (short of a formal guarantee of deposits and/or a commitment to unconditionally support any bank subject to a run) is not enough to stop the concerns by uninsured depositors of banks.

So the Fed wasted an entire weekend announcing nothing and then announced this morning a set of modest steps that does nothing to address the ongoing silent run on banks and the non-silent run on the short term liabilities of non-banks and of the corporate sector. This at a time when the markets was expecting – given the Friday statement of Bernanke – such radical and urgent policy actions. So no wonder that Asian and European equity markets collapsed at their Monday opening and no wonder that US equity markets are down 5-6% today (as of mid-day). So the time to move is now or, better, it was yesterday or a week or a month ago. Any further delay may lead to an implosion of the financial system and serious damage to the corporate system tilting a severe economic recession in a much more grave economic depression.

And even an emergency 50bps or 100bps Fed Funds cut will not do: the Fed has already done 325bps in the last year and interbank spreads have kept on widening while short-term lending in the private sector (banks, non-banks and corporates) is now close to being shut down. Given the risk of insolvency of even the most safe counterparties in the financial and corporate system reducing policy rates will not affect interbank and credit spreads. The only way to stop this liquidity panic is a blanket guarantee of financial sector liabilities and direct public provision of liquidity to the parts of the financial system and the corporate system that are now at risk of a meltdown driven by a liquidity run on their short term liabilities. So it is time for the Fed to stop wasting time and start the actions that will make a difference. We are now at risk of a systemic financial meltdown of the financial system and the corporate sector too.

We are in a state of freefall right now. There is no bottom visible. The reckoning is happening right now.

We're close to the end.