US Considers Backing Bank Debt, Removing Deposit Insurance Limits As Global Markets Continue to Plunge

The global market rout continued overnight, with Asian and European markets suffering sharp drops.  Stock markets were halted in Russian, Romania, Indonesia, and Iceland (just to name a few.)  US futures are pointing to yet another painful drop in the Dow, S&P and Nasdaq.  G-7 leaders are expected to meet today to discuss other drastic measures to take to alleviate the crisis.  The US is now considering guaranteeing bank debt and temporarily insuring all US bank deposits to avoid runs on banks due to worried depositors that have more than the FDIC limits held in their bank accounts.  The credit markets have ceased to function and banks have little access to funding outside of central bank actions.  The UK is proposing guaranteeing up to $432 billion in bank debt maturing up to 36 months.  This should help to alleviate concerns about banks ability to refinance debt within the next three years.  The British government is hoping that by then, some semblance of normalcy will return to the credit markets and banks will be able to borrow money again to meet financing needs.  The US is considering similar plans, as is the G-7.

I believe that guaranteeing bank deposits and bank debt is a much better solution to the panic in the markets.  It is a de facto nationalization of the entire banking system, which renders the $700 billion bailout bill somewhat unnecessary.  The government doesn't need to be buying assets at inflated values from insolvent institutions.  It needs to be prepared to enact liquidations of insolvent institutions while protecting depositors and preventing insolvent institutions from dragging down the rest of the banking sector.  I believe this idea might actually work and would go a long way towards restoring confidence in the lending markets.  That is my hope, at least.