One week ago today, Henry Paulson announced that federal efforts had "stabilized the banking system." On Wednesday a new panic rolled through markets, running to Treasurys. T-bills 90 days and shorter fell to 0.01 percent, and the 10-year T-note dropped from 3.61 percent to 3.01 percent. Few ran to mortgages: Rates fell briefly below 6 percent and are back there today. All ran from non-federal credits, dumping munis and corporates. In prior recessions, the fearful dumped stocks but bought IOUs of most kinds. The resulting cut in the cost of credit helped the economy to bottom. This Treasury separation from all other IOUs began in September, had not been seen since 1930, and marks terminal shortage of credit to the private sector. The S&P 500 closed yesterday at 748. On Dec. 5, 1996, the day Alan Greenspan delivered his "irrational exuberance" speech, the close was 745. The old SOB knew what he was talking about after all. Too bad he forgot later on....
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