Global Government Bailout Capitulation Weekend

Tired of the occasional one-off rescue of a financial institution over the weekend, governments around the world finally threw in the towel and decided to bailout all of their financial institutions simultaneously.  The astonishing coordinated activities are unprecedented and can best be laid out in bullet point form:

• Australia and New Zealand guarantee all bank deposits
• UK injects $63 billion into RBS and HBOS/Lloyds
• Germany set to approve a $600 billion plan to guarantee bank debt and inject money into banks   
  
• Spanish government approves guarantees for issues of new bank debt until December 2009
• U.A.E guarantees bank deposits
• Norway offers commercial banks $55 billion in government bonds in exchange for mortgage debt
• Portugal makes $27 billion available for guaranteeing its banks' financing
• The Fed and other central banks offer unlimited dollar funds with 7, 28 and 84 day maturities at a fixed interest rate
  

Meanwhile, Neel Kashkari, Hank Paulson's right-hand man, gave a speech outlining the Treasury's intent to inject equity into financial institutions.  The program will be optional and aimed at "healthy" firms.  Mr. Kashkari did not mention a plan to guarantee bank debt.  This is an option that is supposedly under consideration (it has been leaked to the press, so it must be true.)  I suspect that if other major countries follow suit, the US will be forced to guarantee bank debt as well so that its financial institutions' debt is not in a disadvantageous position relative to foreign debt.

What to make of this government intervention frenzy?  Well, it is indeed scary for the average taxpayer.  On the other hand, it should be a huge relief for the average holder of a bank deposit.  The terror in the inter-bank lending markets is threatening the future existence of the global financial system.  Most average American citizens have never been in a situation where they had to question the safety of their bank deposits, much less worry about their retirement portfolio getting cut in half within a month because their stock, bond and money market investments are behaving like some crazed emerging market investment vehicle.  These are unprecedented times that require dramatic actions by our government to restore confidence in its citizens so that they don't rush to pull all of their money out of every financial institution and bury it in their backyards.  

Being a complete and total curmudgeon who has been very critical of the Treasury and Fed, I have to admit that I think these drastic actions may finally start to work.  Although it is inevitable that some institutions will fail, it is essential that the healthy institutions are not dragged down by counterparty credit risk fears and depositor panic.  Furthermore, companies in industries not related to financial institutions require access to credit which has completely disappeared in the past month, or the risk of an implosion of the US economy and the American way of life will increase dramatically.  It appears as if money market rates are actually declining.  If nothing else, it is a start...