Democrat delay leads to market seize up

Financial Times:

Money markets seized up once more yesterday amid deepening uncertainty about whether the US Congress will approve the Bush administration’s $700bn financial rescue plan and whether revised proposals would restore confidence.

The flagging state of the markets compelled John McCain, the Republican candidate for president, to announce a suspension of his campaign, and to ask for a postponement of Friday night’s scheduled debate with Barack Obama, his Democratic opponent.

US money market funds sitting on thousands of billions of dollars in assets led the stampede to safety, buying short-term government debt, selling commercial paper and withdrawing funds from the interbank market. As a result, the rates that banks charge each other soared – while yields on Treasury bills plunged.

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The Bush administration has come under overwhelming pressure from both parties to include curbs on executive pay for assisted companies. It has signalled that it will accept more oversight of the programme than it had envisaged.

Ben Bernanke, Federal Reserve chairman, told Congress on Wednesday that he was “not advocating that the government intentionally overpay for these assets” and said turmoil in the markets could lead to greater economic pain. New data showed existing home prices suffered a record drop in August.

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The flight to safety drove the yield on three-month Treasury bills below 0.5 per cent, down from 1.45 per cent just two days before. The benchmark three-month London Interbank Offered Rate jumped 26.5 basis points to 3.476 per cent. British banks have hoarded nearly £6bn with the Bank of England rather than lend it to each other.

“A confluence of fiscal pain has all hit at the same time,” said William O’Donnell, strategist at UBS, highlighting “the swirling uncertainty over the Treasury rescue package” as well as after-effects from the collapse of Lehman Brothers and a traditional repatriation of funds due to the Japanese half year.

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The Democrat stall for goodies is very expensive for investors. This market seizure is making McCain's decision look more selfless and statesmen like. Whether it will effect voters will probably be determined by the outcome, but there is probably going to be a deal done by this weekend and McCain can demonstrate he was involved.