Ed Brayton is a journalist, commentator and speaker. He is the co-founder and president of 
Rep. Brad Sherman (D-CA) said on the House floor that members of the House were told in private that if they didn't vote for the bailout bill, martial law would have to be imposed. Video below the fold:
Now I'm not one of those people who thinks we're on the verge of a dictatorship. I don't think Bush is going to suspend the election and impose martial law (and I have a bet with at least one of my readers on that, though I forget which one now). And if any of you would care to wager on that, I'd be happy to. But even if this threat was being thrown around casually, that speaks to the massive propaganda campaign going on about this bailout.
I have one question I've not seen answered so far. If the credit markets really are "seized up" as so many claim, why aren't interest rates going up? Interest rates are the cost of credit, the cost of borrowing money. If the supply of credit is drying up, interest rates should be skyrocketing. And they're not.
Okay, I have a second question. Since the financing of this $700 billion will almost certainly come from issuing more debt in the form of treasury bills, how does that help with credit liquidity? It should do the opposite because that's $700 billion less money available to others besides the government in the credit markets.
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The most interesting thing I seen so far in this "crisis" is who is in a credit squeeze. Here in MA the state can't get money. I have seen news reports of other states as well. I haven't heard any actual news stories about businesses or individuals not getting money (I still get many offers a week). So I am left wondering, if the bailout was necessary to keep government running on cheap borrowing, and putting off the day of reckoning till another election cycle.
Posted by: Marc | October 6, 2008 9:55 AM
The LIBOR rate has been increasing over the last month. See here. The recent increase does follow a significant decline mapping closely to reductions in the Fed Rate. So, I believe the recent increase is significant inasmuch as it comes at a time that the Fed rate is unchanged.
Banks are not lending to each other (thus causing the increase in the aforementioned LIBOR), or writing any commercial paper that businesses use to finance operations in advance of receivables, because they are retaining cash to meet their short-term obligations that are associated with those now toxic mortage backed investments. By taking those toxic mortgage assets off their balance sheets, it frees up cash for inter-bank lending and writing commercial paper.
Posted by: carlsonjok | October 6, 2008 10:10 AM
That would be me. Just to be clear, I didn't predict that Bush *would* impose martial law; I merely stated that I considered it a real possibility. It is a bet that I very much hope to lose. The bet is for $10 -- not much, but maybe you can use the money to buy a distressed bank or two.
Posted by: xebecs | October 6, 2008 10:25 AM
Yes, the LIBOR rate has stablized now, but the other day it was the highest it has ever been. Look at mid-September.
I am a bit puzzled why it has gone down, but that jump shows the fear. If things go badly; it will jump up and stay up.
All sorts of loans are based on LIBOR. Most mortgages, for example....
Can you imagine what would happen if everyone's mortgage interest rate went up 4 points next quarter?
Posted by: Chris Bell | October 6, 2008 10:43 AM
You might have also seen a story about California needing a loan. They run their state off short-term loans that they simply renew on a regular basis. With credit tightening, California may not be able to find anyone willing to renew their loan.
Posted by: Chris Bell | October 6, 2008 10:51 AM
I wonder why California doesn't just increase the rate it charges for port fees by, say, half a cent or so. Given the volume of freight that comes through them, they could generate a few extra billion that way and they wouldn't be adding any debt. Another good idea for California? A street tax in LA. Not only would they generate tons of cash, they'd also push more people to use transit. It seems to work fine in London, but maybe that's because they have a subway system.
Posted by: Julian | October 6, 2008 11:12 AM
Commercial paper rates are soaring.
Posted by: Davis | October 6, 2008 12:07 PM
Chris Bell: Yes, LIBOR is at the "highest rate ever," but the Treasury has only officially been tracking it since 2001. Private tracking of the rate shows that it stood at almost 9% during the financial crises of 1987 and '89. The current "record" is around 4.1%.
The only "liquidity crisis" we currently face involves the market for short-term commercial paper. As this is one of the more profitable areas of banking right now, the funds will return to this sector soon enough. I see no evidence the free market cannot fix the problem without a bailout.
Posted by: kehrsam | October 6, 2008 12:16 PM
Posted by: Herod the Freemason | October 6, 2008 12:47 PM
ONLY overnight LIBOR rates are at the highest rates ever.
1 month LIBOR rates - no
3 month LIBOR rates - no
and keep going down the list, it is only overnight LIBOR rates.
http://www.bankrate.com/brm/ratewatch/other-indices.asp
Posted by: Marc | October 6, 2008 1:05 PM
If rates are going up and nobody's buying, they aren't going up. Make sense? Ask Ah-nold.
Posted by: Andrea | October 6, 2008 3:31 PM
Ed-- if it helps, "interest rates" could mean a lot of things.
The Fed rate -- the benchmark banks use to lend to each other -- is at about 2% now. That rate is not controlled by the market and the Fed will likely keep it where it is.
The credit crisis is, as others have noted, in the commercial paper market. That's what companies use to finance all kinds of stuff on a short-term basis. A credit freeze takes a long time to work its way through the system, though, because these not everybody needs money this second.
Interest rates ordinarily would have crept up, but the Fed took some steps (lowering its rate) to stop that. In Europe, interest rates are higher (Euro Central Bank is at about 4.5% I think and BofEngland is 4.25% -- someone check I may be off a bit). That's high relative to what we have here. And that's part of the rub -- we have been in a historically low rate environment for a decade and a half. That is, interest rates on house loans, for example, have been in the 6% range on average, and in the last few years have slipped more than that. (At least until 2007). The average over the last few decades was actually a bit higher. And think of how many offers for 0% financing have been around the last few years.
So some of it is relative.
Now, there's another wrinkle in this, and that was the subprime crisis. In a historically low rate environment interest rates were below the rate of inflation, no matter how you measured it. What happens when interest is below the inflation rate? You get paid to borrow (which is why so many people were willing to sign up for mortgages that in any other year they would have rejected). So if inflation on your house is near 10% or whatever, and the house loan is 5%, you make money on the loan.
Of course, the problem then is that you drive up house prices because everybody and his dog wants to buy one because credit is so easy to get. Then you disincentivize the banks from getting the loans paid back by selling the mortgages to other institutions. So loans for houses and cars become a volume business. Remember all those offers of 0% APR financing from car companies?
So you ask, shouldn't rates be higher? They are. It's just that they are higher compared to some of the lowest rates in decades.
Also, remember that the headline interest rates you see are often measured from bonds. That is, in a high interest rate environment people usually expect to see Treasury rates go up but they won't if loads of people want to buy them -- they will go down. The price of the bonds moves inversely with yield.
This further means that safe bonds get more expensive. Treasuries cost a lot. So do the bonds of local municipalities, whose credit ratings are actually OK. (Only Michigan got its rating lowered one grade and that was largely Detroit's fault, but it is still a good credit). The yield you see on them is going to go down. (it has, muni funds have actually been pretty decent performers over the last year or so).
So the high rates you speak of wouldn't show up -- yet -- in ordinary things. That will change. But that also assumes loads of people will still try to take out loans and the like, which may not happen if they stop spending.
Look at Japan. They too had a credit bubble and crash. Interest rates there are insanely low and have been since the 90s. (They were negative not so long ago).
You see higher interest rates when people are worried about inflation. That isn't the case right now. Like, in the late 70s, in a very inflationary environment, T-Bills were at something like 11%. If you bought the NYC junk bonds in 1977 and kept them you'd have made an insane amount of money.
Now we aren't in an inflationary environment, but a deflationary one, which helps keep rates low because you want people to borrow to stimulate the economy. That all may change, of course, depending on a number of things.
Whether the market could have worked this out I guess is academic now. And there are a bunch of things I didn't cover, like the over-leverage in the financial system (essentially taking out too much debt). If a whole lot of institutions are taking out debt, and suddenly they aren't, the demand for credit (and its price) drops.
Don't worry Ed, interest rates will rise. Just not in the usual places consumers see.
Posted by: Jesse | October 6, 2008 4:44 PM
I think an attempt to impose martial law is unlikely, but I think the possibility deserves serious consideration because of the huge impact it would have if it did happen. Damned if I know what to do about though.
Posted by: llewelly | October 6, 2008 4:45 PM
Brad Sherman is my congressman, and I'm thrilled that he voted against the bailout twice. It sounds to me a little bit like paranoid hyperbole. What good would martial law do anyway? Maybe declare a bank holiday like FDR did, or get the markets to close for a day or two, but marital law?
Posted by: Ted H. | October 6, 2008 4:50 PM
We set the odds at 1:1 by default because I was only making a rhetorical point. I don't care about the money and neither does Ed. As I said above, I really, really want to lose the bet. Really.
Posted by: xebecs | October 6, 2008 6:13 PM
Marital law might not be such a bad idea. Let Laura take over for a while; she can't possibly be any worse. ;)
Posted by: DaveL | October 6, 2008 6:23 PM
As I understand it, martial law is also a congressional move where in a sort of 'gag order' is imposed over the proceedings.
Posted by: Quid | October 6, 2008 9:23 PM
Yeah, apparently, the martial law being referred to is some sort of legal parliamentary procedure to speed up the passage of bills (which is most likely to occur during a war, hence its name), and has not the same meaning as the common usage of martial law (suspending of rights, soldiers in the street, curfews, etc.).
Posted by: crf | October 7, 2008 12:51 AM
No, not in this case.
Procedural martial law WAS enacted to ram this bill through.
BUT, Sherman is talking about threats of martial law in the streets if the bill wasn't passed.
Posted by: e | October 7, 2008 1:46 PM
Lord what a mess. And both candidates tonight were an absolute embarrassment on the economy questions. Neither of them has a clue. The right answer is LEAVE IT ALONE. More meddling in the economy is not going to solve problems that were caused by meddling in the first place.
Ed said this:
I have one question I've not seen answered so far. If the credit markets really are "seized up" as so many claim, why aren't interest rates going up? Interest rates are the cost of credit, the cost of borrowing money. If the supply of credit is drying up, interest rates should be skyrocketing. And they're not.
This WAS a propaganda campaign. Interestingly, the government has known about these problems for years, but we were always told that the subprime crisis was "contained" and that the economy was fundamentally strong. All BS. Now, things start going south and Paulson, Bernanke, & Co. desperately need to get a rescue passed - almost as if they were blindsided by all this. They put a gun to the head of Congress and our compliant legislators pass a really bad bill with little thought or debate. On top of that, during the time Congress was debating the bill, the Fed pulled liquidity from the system. Maybe they were thinking that Congress might need a little extra push from more chaos on Wall Street and frantic business owners trying to get short term loans rolled over? Why else would the Fed be pulling liquidity when we have a liquidity crisis? Check out the following link, and notice the 80 billion pulled from the system on 9/19:
http://www.gmtfo.com/RepoReader/OMOps.aspx
Posted by: mroberts | October 7, 2008 10:54 PM