(Washington, D.C. ; Right Commentary): Put simply - the problem with the bailout is this - who are we bailing out, exactly, with the current Bill (HR 1424)? The now 420+ paged monstrosity includes things such as tax breaks for employers who encourage their workers to take bicycles to work, a 2500+ dollar tax for electric vehichle purchases, an alternative fuel tax credit, credits for biodesiel and alternative fuels, credits for carbon dioxide sequestration, credits for geothermal heat pumps, tax breaks for the steel industry, changes to the Alternative Minimum Tax system, oh and among my personal favorites, a seven year amortization table for the expenses associated with development and running a motocycle racing track. Yes, you heard me - motocross racing tax provisions.

A bacon processing facility has less pork than HR 1424. This bill is a mess. A total mess.

When Secretary Paulson and Chairman Bernanke went to Congress and said “the world will explode unless we do this,” I fully accepted that premise. I looked a the LIBOR, the rate that banks look to in determining what to charge each other internationally to lend funds, and saw it rising at a frightening rate. I looked at the activity of the FDIC and the Fed lending, and became very concerned they were being tapped out. I looked at the horizon and correctly predicted the end of Washington Mutual and Wachovia as banks, as well as took stock in the end of Merrill, Lehman, and and AIG, and believed that private capital had dried up. I also understood that banks were hoarding cash, cash they felt they would need to pay panicked investors and depositors. I also concluded that the panic that was spreading through the world financial system placed it on the precipice of complete collapse. I believed our leadership of the world financial system was in jeopardy. I believed that if the capital markets collapsed, the consequences would be far reaching. I looked very quickly at the machinery of the US economy and concluded - wow, this is seriously broken. With no end in sight, and panic continuing to rise, I felt intervention may be the only way to break the downward spiral. Up until reading HR 1424 yesterday evening, I believed market intervention was an appropriate response to a widening crisis.

But not this bill… this bill is a mess.

Also, quite frankly, I have begun to rethink whether or not intervention makes any sense at this point. The primary purpose of the “bail out” was to recapitalize the capital market. By direct investment in US bank assets, the United States would essentially provide long-term liquidity, taking the loans off the books of banks, and replacing it with nice cool cash. The government’s intervention is essentially a spike against a long-understood axiom of market dynamics, “The market can maintain irrationality longer than you can maintain solvency.” The government can wait out the panic, hold the asset, and then slowly liquidate the asset when the market is functioning normally, versus in a time of great distress. The banks themselves would prefer to do this, versus sell their assets for pennies on the dollar, to anyone (especially the Fed). However, as investors clamor for cash, as depositors clamor for cash, banks can’t wait out the market - the irrationality will ensure their insolvency. Thus, Uncle Sam steps in, buys the assets, provides liquidity, prevents larger systemmic bank failures, and everything is okie dokie - at least that’s the plan. The key assumption in this argument is that essentially everyone else is tapped out - only through public financing can this recapitalization be accomplished.

Also - the whole point of the buy-in was to provide capital so that banks start lending again. The new money into the banks will go out as new loans to credit-worthy investors. This restarts the lending cycle, and stability returns to the market. Again - the only way this was supposed to happen was for the US Govenrment to infuse this money into the banking system.

As an economist - I accepted this logic… makes perfect sense. No money - no markets - market intervention restarts the pump.

Then something amazing happened. On Monday, the Fed pumped into the US banking system about 630 BILLION (with a “B”) dollars into the financial markets. The Fed decided to flood the global financial system with $630 billion in cash - by increasing its existing currency swaps with other central banks in the world (such as European Central Bank, Bank of England and Bank of Japan, among others) by $330 billion and by enhancing its emergency lending programme by $300 billion. This is over and above all the other rehydrating programmes initiated by the Fed in the past.

Thus, now over the past year - the Fed has pumped into the system close to a trillion dollars in emergency lending. And banks have started to eat up that capital like it is going out of style. Financial institutions had a record $409.5 billion in loans outstanding from the central bank’s discount window as of Wednesday, up from $262.3 billion a week earlier. Average daily borrowing jumped to $367.8 billion over the week, from $187.8 billion in the prior week. Lending through the Fed’s primary dealer credit facility, created in March for investment banks after the sale of Bear Stearns Cos. to J.P. Morgan Chase & Co., reached a record $146.6 billion Wednesday after hitting $105.7 billion a week earlier. Average daily borrowing through that facility rose to $147.7 billion from $88.2 billion in the previous week. Lending to commercial banks that hold deposits rose to a record $49.5 billion on Wednesday from $39.3 billion a week earlier. Average daily lending through the primary credit facility climbed to $44.5 billion from $39.4 billion in the previous week, the report said. Finally, the Fed also said it provided $152.1 billion in credit as of Wednesday for a recently announced money-market mutual fund liquidity facility, more than double the $72.7 billion it provided on the previous Wednesday.

In short - the Fed is pumping money into the financial system unlike any Fed Chairman has ever pumped money into the system. Essentially, the Fed has made the call to ensure that absolutely no hiccup in liquidity will exist as a result of the inability of the Fed to lend. Internationally, other central banks are following the cue of the Fed and have started to pump in their own cash infusions to try and keep their systems afloat. Moreover, and most importantly, the Fed has essentially agreed to carry this debt cycle with the Banks for an indeterminate period of time. Thus, they are prepared to provide liquidity for essentially “as long as it takes.”

European central banks made more dollars available to money markets Thursday, offering up another US$68 billion in overnight funds to keep the financial system flush with cash.

The European Central Bank, which oversees the 15-nation euro zone, offered US$50 billion, and said it received 55 bids worth US$67.2 billion.

The Bank of England announced a US$10 billion offer on its Web site and said that it allotted US$8.9 billion. It did not say how many banks bid for the cash.

The Swiss National Bank said 13 banks made bids for the US$9 billion it offered.

In response to all of these activities, the US dollar has rebounded in comparison to most other currencies. Something I thought was odd - quite frankly. The massive injections of capital should be seen by the market is inflationary - especially with the prospect of a fed lowering interest rates and a Congress spending like a drunken sailor. That said, the reality is, as bad as things are - apparently - the dollar is such a bargain - people want to hold it versus the Euro or some other currency.

I was surprised. Bully for us.

With all this cash floating into the system, the interbank rates have started to fall. Now they’re not where they should be (essentially in line with the Fed and other central bank rates), but they are falling from their spike last week. This suggests that finally enough cash is flowing into the system that some banks are making a go at lending to each other at attempting to make a bit of cash off the deal. As more and more of the bad banks fail, and banks that are left get a better sense of the liablity/asset ratios, I think some banks are finally seeing the light at the end of the tunnel, and slowly accepting risk in lending to other banks, buoy’ed in part by the massive amount of capital the Fed is pumping into the system. With the Fed willing to carry the banks, I have to think at some point the credit is going to ease, as banks get a sense of their cash requirements and feel stable with the Fed pumping liquidity into their coffers. While they still have to figure out what to do with the non performing assets (the bad debt), the banks don’t have to worry about immediately liquidating the assets to try and pay off panicky investors.

Moreover, with all the FDIC activity - one has to wonder if in fact we won’t avert the crisis of confidence in the US banking system after all. The FDIC continues to step forward and ensure all of the deposits and may decide to temporarily eliminate the cap on deposits all together, as it did in the case of the WaMu transaction with JP Morgan.

With all this money flowing into the system through the Fed and other central banks around the world - what exactly is the $700B going to do?

Other than provide tax credits to bike nuts…. and a myriad of other tax credits…

… I’m not sure it will do much of anything. Beyond expand Government and get a completely idiotic Congress deeply entrenched in Wall Street. That has to be the worst possible situation at this point - given the amount of damage their collectively inactivity has caused investors over the past two weeks.

I don’t support HR 1424. Unless Paulson can explain to the American People why we have to “double down” on this intervention, I can’t fathom what the $700B will do other than crowd out private investment and cripple the economy with blistering borrowing costs and a need to raise taxes to pay for it.

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