THE ECONOMY ON HOLD.....MASS MOUTHING OFF

If you're looking for venture capital funds to help you start a new business, you might as well take a vacation instead. Or go to bed. Because until Thursday -- and even then only if an already demonstrably suicidal Congress decides that it prefers LIFE to DEATH -- you will get nothing. There simply is NO money changing hands out there, beyond the cash that people have in their hands.

If you're looking for an auto loan, or to buy some furniture on credit, you too might as well move on to Plan B. Because there is no money available for credit purchases.

If you're expecting your pay check from your job this Friday, you too might as well keep your fingers crossed. Because if Thursday brings us another Suicide Vote in Congress, many payrolls will not be funded -- most depend upon overnight borrowing into payroll accounts.

Here I think I need to explain a little. You work for a company, let's say, that pays its employees weekly. It sounds automatic; but it isn't. The only reason that your weekly pay check gets paid weekly, every week, is that your company has sufficiently good credit to be able to borrow overnight funds to the extent needed to meet payroll. Why does your company need access to overnight money ? Simple. Most companies bill their customers on a 30-day invoice basis. Some weeks a lot of money comes in; some weeks, not so much. Some weeks maybe almost nothing. Of course most of your companies customer invoices are solid credits. They WILL be paid. But there is no requirement that they all be paid in the same time frame. Thus the overnight borrowing is needed. It's called "managing your cash flow."

All of this "automatic" convenience is now at risk thanks to the House's Suicide Squad. We're back to the 18th Century now, or even earlier, before the time when commerce created overnight and short-term borrowings for companies needing to meet regular obligations. For the Suicide Squad, it's CASH ONLY. Your company lacks cash, you don't get paid, end of story.

Granted that things may well not get this bad. The Federal Reserve Bank still controls the U.S. money supply. It still makes money available to all banks that have a right to apply to the Fed's "window" -- and all federally chartered banks have that right. The Fed can still schedule auctions of Treasury bonds -- and right now Treasury Bonds are very, very much in demand. Thus the Federal Reserve has tremendous powers to infuse the financial system.

What the Fed does NOT have, however, if the Paulson Rescue Plan is not voted favorably by the Suicide Squad, is the authority to buy up the trillion-plus dollars of bad mortgages that are now choking the entire U.S. financial system. May I explain ? Simple: the Fed's rules require that a bank reserve the full face value of a bank's non-performing (defaulting) obligations. Thus, if a bank holds $ 100 billion of mortgages, and 20 % of them are in default, the bank must reserve $ 20 billion in cash. Yet the Fed requires a bank to reserve only 8 % of its outstanding NON -DEFAULT obligations. If Bank A's $ 100 billion in mortgages were entirely not in default, it would need to reserve only $ 8 billion.

In other words, if Bank A has 20 % of its mortgages in default, this would completely wipe out its entire reserve cash AND obligate the bank to come up with $ 12 billion more, at a MINIMUM. In actuality, Bank A would need to come up with a lot more than that. It would need to come up with the $ 12 billion to reserve its defaulted mortgages; but the bank also holds $ 80 billion of non-default mortgages. These require asn additional $ 6.4 billion in reserve capital.

Thus Bank A, holding 20 % of its mortgages in default, needs to come up with a MINIMUM of $ 18.4 billion in cash money. If not, Bank A is insolvent and subject to seizure by the Federal Reserve.

This is how things now stand. The Suicide Squad thinks that if Bank A gets seized, it's only a just desert for bankers who didn't manage their money properly. But today it is not just Bank A that is at risk, it's the ENTIRE financial system. Because about $ 1.5 trillion of mortgage obligations are in default. And who but the Fed has $ 1.5 trillion ? Or, to put it the Paulson way, who but the Fed has $ 700 billion to buy defaulted mortgages at a default price? And thus get them off the books of banks and thereby free up bank capital to flow through the economy again ?

Or does the Suicide Squad have this money ? Yeah right...