Martial Law?

An interesting video (hat tip Patrick).

As I wrote previously, some very scary scenarios are being kicked around Capitol Hill.  Paulson and Bernanke know what’s at stake if the financial crisis devolves into nationwide bank runs.  They shared those feelings during a meeting two Thursdays ago:

Senator Chris Dodd:  congressional leaders were told “that we’re literally maybe days away from a complete meltdown of our financial system, with all the implications here at home and globally.”

Senator Chuck Schumer: “Had [the administration] said to the American people what they said to us in the room that night, the plan would have passed through Congress like a hot knife through butter,” said New York Democratic Sen. Charles Schumer. He doesn’t necessarily fault Mr. Paulson, because speaking in such stark terms could have unsettled markets and worsened the problem Mr. Paulson was trying to fix.

Now, does the fact that the sky didn’t fall last Monday prove that Sherman is right about the sky not falling?  Hardly.  The TED spread shows that the credit markets are as frozen as ever.  Short-term interest rates remain at unprecedented levels because banks aren’t willing to lend money at any price. They’re too afraid to lend.  No one knows which banks are hiding the largest losses and they’re hoarding cash to protect themselves.

The banking system hasn’t collapsed because central banks and federal governments are pumping trillions of capital into financial markets (either explicitly through bailout plans and Fed lending, or implicitly through new financial insurance policies.  See for instance the U.S., Germany, Ireland, Greece, and the UK)

Whatever Rep. Sherman thinks, worldwide bank runs remain a distinct possiblility in this environment.  If that happens, martial law doesn’t seem out of the question.

Posted in Economy, Fed, banking, credit crunch, politics |