Richard Whalen

Like making sausage, financing the U.S. economy, a multi-trillion dollar daily operation, is best appreciated as an abstract result. There’s no need to witness the concrete details of the process that includes rooms full of sweating traders yelling at each other. That’s the human fear-and-greed part that has not yet been computerized.

A major financial catastrophe is waiting to happen in such trading rooms around the world, leading very likely to a global financial crisis and panic, unless American financial officials, regulators and Congressional oversight committees address more urgently the spreading contagion of doubt in our markets. These markets are nervous and shaky because participants realize that much beyond their control is not right.

The universally known crisis of doubt surrounding subprime mortgages, which is leading to spiraling defaults and foreclosures, has not been “contained” in that sector as the authorities had hoped. On the contrary, it is spreading throughout the vast paper economy underlying the U.S. credit system, infecting prime mortgages, car loans, student loans – the works. Doubts about debt repayment are growing. Rumors move markets and when fear spreads a rumor, traders turn panicky.

Major U.S. banks, corporations and investment banking firms finance themselves in the huge commercial paper market, where they sell unsecured paper IOUs for very short terms, usually overnight. In this kind of market, reputation is everything. A “name” stands behind the paper it issues or it never issues paper again.

The doubts seeping into U.S. markets focus on some of the biggest and best-known names in the marketplace, names such as Citigroup that are, as it is often said, “too big to fail.” That may be true, but if the authorities move too slowly to remedy weaknesses, and if events/rumors gallop ahead of prudent actions, the unthinkable can occur swiftly.

The Bush Administration, led by Treasury Secretary Hank Paulson, is moving much too slowly to address the dangerously inadequate capital of major banks. Congressional Committees are just beginning to hold hearings. The prevailing assumption is that substantive policy action and legislation can be deferred until after the November 2008 elections, and until the 111th Congress gets organized, sometime after January 2009. This is a dangerous delusion.

Congress needs to revive the Resolution Trust Corporation, the indispensable agency used to cope with the collapse of the S & L industry in the early 1990s. Fortunately, some of the seasoned crisis managers who dealt with the S & Ls are still available to share their experience. Secretary Paulson and Federal Reserve Chairman Ben Bernanke should tap this invaluable expertise before a bank commercial paper user fails.

It would be extremely embarrassing if Secretary Paulson, who visits Beijing two or three times monthly to kow-tow to our biggest creditor, had to seek an emergency loan from the Bank of China to bail out Citigroup before he and Congress got around to the wider problem – our banks have the shorts