Due to massive losses, uncertainty, and loss of confidence, credit markets have seized up and it is becoming more difficult for banks to borrow from each other. Congress is working on putting together a purported $700 billion bailout package to assist firms that are in danger of collapse because they cannot find sources of capital to meet reserve requirements.
I will agree that the situation is poor, but I do not think it has yet reached cataclysmic proportions. Many say that the financial system is breaking down, but I say that it is a free market that is working just as it is supposed to. The cost of interbank borrowing has risen, but for good reason. If a bank wants to borrow from another to meet reserve requirements, but there is more risk than there is under normal circumstances, the lending bank needs compensation for that risk.
Unfortunately, the media has made the situation even worse. I believe that is a big reason why Washington Mutual has collapsed. People begin to panic that their bank is going to close its doors (even though more than likely, the deposits those people have are well below the FDIC insurable limits), so they take out all their money. When the deposits drop, the bank needs to increase reserves so it has to borrow. With the cost of borrowing high and sources of capital diminishing, it becomes impossible for the bank to maintain solvency. I think the media had a big effect on sending people to their branches to take out all their money and stuff it under their mattresses.
I was actually pleased to learn this morning that talks on the bailout package are breaking down. I believe that the vast majority of Americans do not want such a bailout to take place. Everyone I hear talking about this issue around the water cooler says they do not want it to happen. Let’s hope that Congress will lend an ear to constituents, and not pass legislation that will cost us for generations to come. A breakdown in the democracy in which this great nation was founded would be far worse than failure of the financial system.