Updated: Musings About the Next Six Months, Post-TARP

So let’s say that TARP passes todaythe TARP bailout package has passed the U.S. House of Representatives.  I could be wrong, but that seems reasonably likely (although some disagree). What happens next?

Credit

My guess is that things settle down slightly in the credit markets, but that spreads remain gigantic, with destructive rates to the best borrowers, virtually zero lending to the worst, and interbank rates in nosebleed territory. The Fed will respond with more rate cuts, taking things to Japanese zero rate territory and more or less leaving it there. That won’t change the problems materially, but it will take off some pressure.

Equities

After the initial post-passage nuttiness — it seems like everyone I know is planning to sell into a same-day post-TARP rally, which could mean there won’t be one — equity markets could still surprise here, with it possible that we see a rally, even one that lasts a little while. After all, markets are at the lows of the year, there has been a parade of bad news, and the Dow has had only three up weeks since June, and no up month since April. Granted, we are likely set for the worst recession in recent history, but, as the kids like to say, the market newly knows that already. I think.

Municipals

Outside of corporates and equities, it is likely we will see some serious problems with the weakest debt-dependent cities and regions. They will be unable to borrow at rates that allow them to squeeze through any longer, and we will see stories about cities looking at cutting back to bare bones on essential services, plus failing colleges, etc. Expect oodles of those headlines, and more demands for bailouts.

Political

Some time after the U.S. presidential election, with credit markets still a mess, banks failing all over the landscape, and no real end in sight, we will likely see the new president pull together some sort of TARP II commission. What should we do, post-Paulson, to prevent this crisis from further deepening and continuing? Top of the agenda will be further fiscal stimulus, and, in all likelihood, an explicit recapitalization of the banking system, with government picking favorites.

Cheery thoughts. Feel free to disabuse me of them, of course. Or tell me I’m optimistic. Whatever works for you.

[Update] In updating this post post-TARP passage I lost the comments previously attached to it. Sorry, folks.

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