BAIL-OUT FEARS HIT MONEY MARKETS

Money markets seized up once more yesterday amid deepening uncertainty about whether Congress will approve the Bush administration's $700bn financial rescue plan and whether revised proposals would succeed in restoring confidence.
The rates that banks charge each other soared as investors sought the safety of short-dated US government debt – and US officials struggled to address mounting objections to the rescue plan in Congress and beyond.
Ben Bernanke, Federal Reserve chairman, argued against suggestions that the scheme would pay too much for distressed assets, and the head of the Congressional Budget Office warned lawmakers of possible “chaos” if Congress does nothing.
“You would have a financial market meltdown that would cause very severe dislocations . . . maybe on the magnitude of the Great Depression,” said Peter Orszag, the CBO chief.
The flight to safety drove the yield on three-month Treasury bills below 0.5 per cent, down from 1.45 per cent just two days before. The benchmark three-month London Interbank Offered Rate jumped 26.5 basis points to 3.476 per cent.
New data showed existing home prices suffered a record drop in August, weakening the US dollar and deepening concern over a rising tide of home foreclosures and loan defaults.
“A confluence of fiscal pain has all hit at the same time,” said William O'Donnell, strategist at UBS, highlighting “the swirling uncertainty over the Treasury rescue package” as well as after-effects from the collapse of Lehman Brothers and a traditional repatriation of funds due to the Japanese half year.
Although Democratic and Republican leaders, including the party's presidential nominees, have called for a bipartisan effort to address the financial crisis, they have all also expressed deep misgivings about the current proposal.
In a poll by the Los Angeles Times and Bloomberg, 55 per cent of respondents said they did not believe taxpayer dollars should go to rescue financial groups. John McCain, the Republican presidential nominee, refused to commit to supporting it.