While the actions of the SEC to suddenly change the rules mid-game were troubling, as were the recent Fed decisions to blatantly ignore its own charter, I am seeing something equally worrisome developing out there.

There is a breakdown between what the paper markets (futures, options, stocks, Foreign Exchange, etc) are saying is "the price" and what we are experiencing out in the real world.

The "Bailout Bill" has failed to pass the House by a vote of 228-205.  There were defections in both parties. (By my count, that leaves two individuals not voting – hiding in the restroom maybe?)

This has to mark one of the most important watershed moments for the people of this country.  They were heard and represented over and above those of the well-connected and paid.

I am going to be keeping an exceptionally close eye on the markets today, obviously.  It is vitally important that the world respond ‘appropriately’ to the US bailout plan.

By appropriately, I mean that all paper assets need to go up in price.

At the outset, it’s quite the mixed bag.

As expected, the dollar was bought with a vengeance all night long.  Don’t open any economic textbooks, especially those that rely on any theories of "supply" and "demand," for an explanation of why this should be.

This is another astounding article by the very respectable Gretchen Morgenson of the NY Times.

It is astounding because of all that is revealed in the opening paragraphs.

[quote]Two weeks ago, the nation’s most powerful regulators and bankers huddled in the Lower Manhattan fortress that is the Federal Reserve Bank of New York, desperately trying to stave off disaster.

As the group, led by Treasury Secretary Henry M. Paulson Jr., pondered the collapse of one of America’s oldest investment banks, Lehman Brothers, a more dangerous threat emerged: American International Group, the world’s largest insurer, was teetering. A.I.G. needed billions of dollars to right itself and had suddenly begged for help.

The only Wall Street chief executive participating in the meeting was Lloyd C. Blankfein of Goldman Sachs, Mr. Paulson’s former firm. Mr. Blankfein had particular reason for concern.

Although it was not widely known, Goldman, a Wall Street stalwart that had seemed immune to its rivals’ woes, was A.I.G.’s largest trading partner, according to six people close to the insurer who requested anonymity because of confidentiality agreements. A collapse of the insurer threatened to leave a hole of as much as $20 billion in Goldman’s side, several of these people said.

Days later, federal officials, who had let Lehman die and initially balked at tossing a lifeline to A.I.G., ended up bailing out the insurer for $85 billion.[/quote]

Having watched the currency markets for long enough to know, I am certain that they are among the most regularly interfered-with of them all.  

In this article it is openly speculated that perhaps a joint support of the dollar is in the works:

[quote]Sept. 29 (Bloomberg) — A growing number of currency traders and strategists are starting to speculate that finance ministers from the world’s biggest economies will join to support the dollar.

"We’re getting closer to the right conditions for authorities to step in and prop up the dollar,” said Maxime Tessier, who manages $151 billion as head of foreign exchange in Montreal at Caisse de Depot et Placement. "The nightmare scenario will be a wholesale loss of confidence in the dollar.”

"The central banks of the world have embarked on all sorts of extraordinary interventions,” said Stephen Jen, the global head of currency research at Morgan Stanley in London. "Currency joint intervention would be the least surprising. And it would probably be the cheapest.” [/quote]

As predicted by many here and elsewhere, a great show of "protecting the taxpayer" commenced, but, in the end, the bailout bill sailed through largely unchanged.

[quote]WASHINGTON — Congressional leaders and the Bush administration reached a tentative agreement early Sunday on what may become the largest financial bailout in American history, authorizing the Treasury to purchase $700 billion in troubled debt from ailing firms in an extraordinary intervention to prevent widespread economic collapse.[/quote]

Uh oh.

File this one under "oops".

[quote]Sept. 25 (Bloomberg) — Japan, China and other holders of U.S. government debt must quickly reach an agreement to prevent panic sales leading to a global financial collapse, said Yu Yongding, a former adviser to the Chinese central bank.

"We are in the same boat, we must cooperate,” Yu said in an interview in Beijing on Sept. 23. "If there’s no selling in a panicked way, then China willingly can continue to provide our financial support by continuing to hold U.S. assets.”

An agreement is needed so that no nation rushes to sell, "causing a collapse."
[/quote]

This news is from yesterday, but it bears mentioning.

[quote]From 2002 to 2007, U.S. lenders made a total of $2.5 trillion in subprime mortgages, according to the newsletter Inside Mortgage Finance. "Given the magnitude of the bad loans still on bank balance sheets, it would be miraculous for the FDIC to squeak by with losses of less than $200 billion,” Whalen says. [/quote]