Mattress Time

Wouldn't you know it took a British newspaper to report this. From the Financial Times of London, via Firedoglake, via Atrios:

The Fed added that it was suspending a rule that normally prohibits deposit-taking banks from using deposits to help finance their investment banking subsidiaries to allow them to fund activities normally funded in the repo market on a temporary basis until January 30 2009.

This sounds to me like the Fed giving permission to the banks to take our money and throw it into the breach. Trying to fill a nearly-infinite vacuum is what they're doing.

Atrios calls it "mattress time." He's right.

WaMu will fold

If you have money deposited at Washington Mutual, get it out. WaMu is going down, possibly in a matter of days. Today Standard and Poor's downgraded the huge investment bank to triple-B-minus. That's deep junk.

When this insolvent pile of garbage goes, the Federal Reserve and Federal Deposit Insurance Corporation are going to be caught between Scylla and Charybdis, as literary types like to say. I'm not sure they can "create" enough money to back insured deposits, because that bank is so huge. Technically they can, but if they do, they'll degrade the value of the dollar so severely that we might lose our medium of exchange, and they know that.

The Fed is on the hook for Fanny and Freddie, which together have 200 billions of assets, graciously supplied by the Fed, and six trillions in debt, much of it bad debt. So the Fed is already overextended. The action they take -- or don't -- when WaMu goes under may determine a) whether we still have a dollar by Christmas, or b) whether instead people like us with money deposited in the Washington Mutual bank will lose it all.