Banks begin rush for US bailout funds

Hundreds more institutions have indicated interest in joining in, according to the Treasury. The question thus may be whether the US has allocated enough money to the effort – not whether it can cajole regional banks to get involved.

Combined with the actions being taken by the Federal Reserve, which include bolstering the short-term credit markets by direct purchase of commercial paper, the Treasury's bank effort is "huge," says Brian Bethune, chief economist at IHS Global Insight, an economic analysis and forecasting company in Lexington, Mass.

But the negative forces at work in the economy are also powerful, says Mr. Bethune. Thus, in terms of the nation's financial markets, "there's this massive battle going on," he says.

There are some signs that the Treasury effort is making progress. Lending between financial institutions has begun moving again, noted Phillip Swagel, assistant secretary of the Treasury for economic policy, in a statement released Monday.

The spread between three-month interbank loans and the risk-free three-month Treasury bill rate has begun to narrow, falling from a high of 457 basis points to about 260 basis points, said Mr. Swagel. But he added that this spread, known as the "TED spread," remains high by historical standards.

Prior to mid-2007, the TED spread averaged about 40 basis points.

"It will take time for financial markets to stabilize and for credit market strains to ease," concluded Swagel.

Lending to nonfinancial institutions remains tight. On Monday, the Federal Reserve said its latest quarterly survey of bank lending practices found high numbers of banks reporting tighter credit standards across a broad range of loan products.

Fully 95 percent of banks reported tighter standards for the lines of credit they extend to large and medium-size businesses, for instance. Sixty percent said they had tightened standards for consumer credit-card debt.

"The lending picture is very much a mess," says Mr. Brusca of Fact and Opinion Economics.

That mess can be seen in the drop in auto sales, for instance, according to Brusca. Overall auto sales fell 32 percent in October, compared with the same month last year. General Motors' sales fell 45 percent.

Many auto loans are made by financial arms of the auto industry to buyers without sterling credit. In the past, those loans were secured by the collateral of the vehicle itself. But given the overall weak market for cars and trucks, that collateral is no longer enough.

"Nobody wants to make those loans anymore," says Brusca.

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