Breaking: State of Massachusetts denied credit! The other shoe is dropping, guys.

[beachmom]

http://www.boston.com/business/articles/2008/09/30/unknown_terrain_for_economy/

Unknown terrain for economy

In an example of how fragile credit markets have become, the state of Massachusetts yesterday tried to borrow $400 million to make its routine quarterly local aid payments to cities and towns. State treasury officials said the credit markets abruptly froze midday, leaving them $170 million short. The state will have to use its own funds to complete the local aid payments, draining the state's balance to extremely low levels.

"I don't think any treasurer alive could say they've ever seen anything like this," said Timothy P. Cahill, the state's treasurer. "There have always been cash shortages, but you could always go to the market and get more. This is the first time we haven't been able to do that."

Cahill said he believes the credit market will in effect remain shuttered today as the nation's largest lenders hold on to their cash amid uncertainty over plans for a federal bailout. In short, the House's rejection of a $700 billion Wall Street bailout plan takes Massachusetts and the rest of the US economy into territory that few policy makers and analysts wanted to explore.

...

The federal bailout proposal called for the government to spend up to $700 billion to buy mortgage-based securities and other holdings from financial firms. The idea is to boost confidence in those companies by taking the troubled investments, whose values have been sapped by the subprime mortgage market meltdown, off their books. Banks and other financial firms have stopped lending money to one another, afraid that their counterparts may have large holdings of such mortgage-backed assets, and could be in the same danger that caused firms such as Lehman Brothers to file for bankruptcy.

"These markets have to be stabilized somehow, " said Eugene White, economics professor at Rutgers University. "If we get into a downward spiral of credit tightening, more people will lose jobs, they'll stop buying goods and services, and we're in a recession that will be hard to get out of."

White said the collapse of the financial system and the subsequent drying up of credit created such a spiral in the early 1930s, turning the economic downturn into the Great Depression. He said the House's failure to act could be compared to the Fed of that period, which largely stood on the sidelines during a wave of bank failures. "We need government to come in and take decisive action," White said.

This is the "hidden" story which is not as easy to gauge as the stock market. I think the House Republicans made an unbelievable strategic blunder tomorrow, which they will pay for in the election. But honestly, I would have rather done not as well in the election, and had them do the right thing and voted for the bailout in the numbers they had promised.