The Fed did nothing over the weekend, then announced ineffectual measures: Depression more likely.

RGE - The Fed keeps on wasting time while the mother of all bank runs is underway

Nouriel Roubini | Oct 6, 2008

Last Friday I pointed out in my “Financial and Corporate System is in Cardiac Arrest: The Risk of the Mother of All Bank Runs” that we were at the point of a risk of a systemic financial meltdown with the beginning of the mother of all bank runs: stock markets gave a vote of no confidence to the Senate passage of the TARP legislation (equities down 4% on Thursday) and to the House passage of the legislation on Friday (equities down 3% after the passage of the bill in the House). At the same time last week money markets, interbank markets, credit markets were all imploding with all interbank spread at new all time highs, credit spreads going up through the roof and the roll-off of the financing – via commercial paper – of the corporate system.

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Indeed by last week a mother of all bank and non-bank runs was underway and even a well designed and well implemented TARP (let alone the poorly designed one passed by Congress) could not address the problem of a short term liquidity panic and run.

And with the liquidity and credit and banking crisis hitting European financial institutions this severe crisis was becoming global last week. I then suggested that only radical and urgent action could stop this mother of all runs such as the following ones:

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- direct Fed lending to the corporate sector via Fed buying the commercial paper that corporates are not able to roll over; and possibly even lending to state and local governments that are a now also facing a roll-off of their maturing short-term liabilities.

 That's pretty much what I said here. Guess it wasn't such a crazy idea after all. One of the primary purposes of government is to keep essential services going. If that means government has to provide credit, then it provides credit. It's just that simple, folks.

- a coordinated 100bps reduction in policy rates by all major advanced economies central bank and, possibly, even some emerging market economies central banks;

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....

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.

  Now we are back to the incompetence-or-intent question. I think incompetence is becoming less and less plausible with each passing day, and the possibility that the Bush thugs are deliberately destroying the economic system more plausible. The proximity to the election cannot be ignored, yet this seems to be hurting McCain; could the economy be crashed rapidly enough to create a state of civil disorder or some other pretext for indefinitely postponing elections? Or perhaps they are simply conducting a scorched-earth policy, with the side benefit that they end up with what money is left and can buy all classes of assets for next to nothing, meaning they end up owning the country regardless of who is President.