KEY POINTS:
The United States' Emergency Economic Stabilisation Act 2008 is no panacea, but its passage will hopefully avert what could have been a very brutal lesson in the vital importance of functioning credit markets.
It may have been the arresting US$1 trillion wiped of the value of US shares after Congress' shock rejection of the original bill on Monday.
It may have been Governor Arnold Schwarzenegger telling them that California - one of the largest economies in the world - might need an emergency US$7 billion loan from the Federal Government in order to keep meeting its payroll.
It may have been the lubricating qualities of more than US$100 billion of pork fat attached to the bill (tax relief for speedway operators, American Samoan businesses, the manufacturers of wooden toy arrows and so on, and on).
Whatever. US legislators have at least spared us the possibility of a prolonged period of limbo and uncertainty in these perilous times. They are set to spend the next month campaigning, and it will be at least as long again before a new Administration and Congress are bedded down.
That is a long time for the US Government's cheque book to be, in effect, locked away.
But whoever is in power in Washington in the New Year will have to confront the issue of recapitalising the banking system.
Here's the problem in round numbers.
The US$700 billion, which the legislation makes available for the Treasury to act as a buyer of last resort for mortgage-backed securities, equates to only 10 per cent of the US$7 trillion total face value of those securities on issue.
Some reports indicate they have been selling - where a buyer can be found - at 70 or 80 per cent below their face value. That is an excessive discount, which the bailout/rescue plan is intended to reduce.
The US residential property market has fallen "only" about 20 per cent, and most mortgages are not under water at all.
But in addition to the effect of lower house prices, the value of mortgage-backed securities has to be written down to reflect the evaporation of the insurance arrangements which boosted their value on the way up.
This leaves a pretty big hole in the balance sheets of the banks, and in this globalised world not just US ones.
Then there is a multiplier effect. Every dollar of bank capital supports many times its weight in lending power. So we are already stuck with a big contraction in the availability of credit around the world. In short, a global recession.
UBS estimates the total value of debt in the US at US$48 trillion. The experience of previous downturns suggests between 3 and 5 per cent of that will have to be written off in a mark-to-market system - US$1.5 trillion to $2.5 trillion.
Even if half of that is eventually recovered, and allowing for more than US$300 billion of fresh capital that has already been raised, that suggests the US banking system may be undercapitalised to the turn of US$700 billion, UBS economists say.
Who has that sort of money and might be willing to put it at risk?
That's the question which will have to be confronted next year.
