Here's my take on it.

The bail-out package should mitigate the problems, but it will not avert them. To date governments have been dealing with the problems one at a time. They have struggled to gain control not just because of the speed of contagion but also because politicians and central bankers do not fully to understand the breadth and depth of the crisis. For example, Germany’s finance minister declared on September 25th that America was “the source and the focus of the crisis”; the governor of the Bank of France declared “there is no drama in front of us”. Since then several European banks have been failed-out.

The problems have also hit banks outside the US and Europe in Hong Kong, Russia and India. Some European countries, including the British, Irish and Spanish banks, also have housing bubbles.

Governments need to co-ordinate. Unfortunately Greece has probably prevented or delayed the French sponsored European EUR300bn plan by following Ireland and guaranteeing all deposits.

The money markets are the plumbing of the financial system. Banks and companies lend and borrow trillions of dollars for up to a year at a time but the markets for longer term paper are shutdown, so banks and companies must borrow even more money overnight than usual. Investors are unwilling to lend for long, many companies are unable to sell any commercial paper with a maturity longer than overnight. Those that have lines of credit with banks are increasingly drawing on them. This is causing the banks more problems.

Companies face higher interest charges and are also losing access to bank loans altogether. So they also hoard cash, cancelling acquisitions and investments, in order to pay down debt, delay new products, leaving factories unbuilt, shut loss-making divisions, and cut costs and jobs. They will no longer extend credit and loans will become harder to obtain and more expensive, unemployment will rise. Private-equity groups that bought companies with leveraged buy-outs will find it harder to refinance their debts.

Bank borrowing costs reached almost 7% on September 30th, more than three times the level of official American rates, while some were willing to pay 11% to borrow dollars from the European Central Bank (ECB). Banks have become so risk-averse that they deposited EUR44bn with the ECB on September 30th (quarter end) even though they could have earned far more by lending to other banks.

Over the coming weeks the CDS market faces its biggest test as billions of dollars worth of contracts on Fannie Mae, Freddie Mac, Lehmans and WaMu are settled. An auction is scheduled for next Tuesday to evaluate a price for Fannie Mae and Freddie Mac CDs. Estimates are that payments on Lehman's bonds could be as much as $350bn. I fear that some underwriters have insufficient capital and will simply go bust when the claims are made.

Interestingly Buffet has just pumped USD3bn into GE; I would be reluctant to bet against Buffet!

I just heard that Fannie & Freddie contributed over $200m to congressmen, they were one of the biggest lobbyists. Why the heck is there so much money swilling around in US politics??

I think what's more likely is what we're already seeing being reported in this thread: outright absorption of less-well-capitalised operations. Why extend a private line of credit when you can just pick up the service for a song?

Whether an overall trend in this direction is good or bad is going to depend on your point of view, methinks.

I agree. And even more simply, why can't my mother "loan" my brother $150K for his house at 5% interest? She gets more and he pays less. Othewise, she get 2-3% interest and he pays 6%. Why not keep that money in the family/community?

It leaves more oil for later, and forces adaptation to less oil sooner. Those are good things.

When you think of the oil in the ground as finite and unsubstitutable then the logic changes. Treat it like the last few tins of biscuits on the lifeboat. Why should the goal be to deplete it as fast as possible?

Some oil majors are sending emails to all employees talking about the financial crisis.

-- supplier stability
-- customer problems paying
-- insurance risks
-- pension investments
-- oil price swings
-- exchange rate swings
-- economic slowdown
-- falling confidence

That's what the biggest companies are worried about.

Of course, it's much worse for the smaller companies...

Is he friends with the Chief Economist at BP who thinks that there is zero evidence of Peak Oil, as long as one isn't concerned about costs?

Oil a-plenty

BP's chief economist vehemently countered the idea that the world was facing a physical shortage of oil as proposed by 'peak oil' theorists. "I have no reason to accept peak oil as a valid statement either on theoretical, scientific or ideological grounds," he said.

"There is no resource constraint at the moment for oil. There is enough oil if you're willing to accept the costs – including the environmental costs for sources like tar sands," he added.

LOL.

Interesting comment re: oil companies having to be their own financiers...take that trajectory a few steps out...

Ask your Chevron friend how much money/and or energy it takes them to find a NEW barrel of oil, on average...My fear is that world production is mixing old cheap oil with new expensive oil and showing a big profit - this profit is subsidized by relatively cheap marginal production but new fixed infrastructure rapidly raising avg cost. If he could get us some data on this it would be most appreciated...Will he join us?

;-)

It would be an interesting trap for Big Oil if just after diverging themselves of their own stations (which many have been doing) due to declining end margins they had to get back in on the backside via credit to sell their products.

House prices ramped up to the point of unaffordability at any prudent multiple of income are not psychological, and nor is a high level of personal, corporate and Governmental indebtedness.
That is why the Paulson plan is a scam which does not even begin to tackle the real issues.
It is based on the false premise that the housing market will recover.

The loss of confidence is based on sound reason, that the Ponzi scheme in housing is over.

With or without lipstick?

Terrible news sir three Brazilian soldiers where killed in Iraq today.

GWB: That's terrible, how many is a Brazilian?

That's certainly not what the Barclays Capital report into this problem stated. If this bomb is set off, then the markets would simply cease, even if some would still be able to hand out cash to those collecting. The neutral trade nature does not alter the fact that a systemic crash in short time pretty much pisses on everyone's parade.

tonyw, you could be right lets make it a date to talk it over when we are standing in the bread line, but for now I say it isn't the derivatives but what underlies the derivatives that is worrying.

Unfortunately they don't seem to understand with derivatives

Unfortunately, it is you who doesn't understand. I'm fine, thank you.

Let me put this as simple as I can: For any deal -perhaps bet is a better word here- to be finalized, the buyer -loser- will have to be able to pay up. If not, then what? This is called counterparty risk.

Say you go to the racetrack and put a bet on a horse. Your bookie allows you (he knows you got some cash) to take that ticket and use it as collateral for a bet on the next race, without knowing the outcome of the first. Rinse and repeat. You place a thousand bets. You're now in over your head, but your bookie doesn't realize that. Plus, it works like a shine as long as your horses win, which they do for a while. So did Charles Ponzi. But...

And that's by no means the entire story. Your buddies want in on the free manna from heaven deal. So you sell them the risk on the risk on the risk on the risk of all your layered and leveraged bets (they, too, know you got some cash). They then take the tickets to the bookies' window as collateral for another bet. Again, rinse and repeat. And they too have friends who want in. Rinse and repeat.

This is how this scheme got to be as big as a quadrillion dollars. This is also why the consequences of the by now inevitable losses will be far more severe than you understand.

Just imagine that you, the first one to place a bet, see your first horse lose, or even just your thousandth, and follow the chain of friends and events from there. The essence is that risk has been used to collateralize risk, which only works on the way up.

Yes, there is a standard procedure to handle these events. The bookie volunteers to redesign your kneecaps.

And it all ends in:

Permanent Emergency

Agree. Stoneleigh and Ilargi have had the most amazing foresight. They have been wrong about practically nothing. The melt down of the financial world has been the greater story and unfortunately, money is the real lubricant of society. It wouldn't have had to be this way, but the greed, politics, lobbying in Washington, and financial instruments used in this housing market scheme will bring us all down in most likely a fast crash scenario. As America and the world now deflates away, at least they have prepared us for what to expect. There are still those unfortunate souls who think Hank just opened up the floodgates of liquidity to begin our journey down the lane of hyper-inflation. What Hank, Ben, Bush, Nancy, and Barney just did to this nation, we have yet to see. I've got some ideas. I hope I'm wrong. This day, too, will go down in the history books.