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Weekend Reading: On the Edge

Paul Kedrosky

Good Sunday afternoon, and welcome to Weekend Reading. First, a look back at the week that just finished, then a look forward to the week ahead, and finally, a summary of articles and papers worth reading.

We teetered on a precipice again last week. Credit markets locked up, risk spreads were at historical levels and we had the largest bank failure in U.S. history. All the while, Congress fiddled and played politics. The result: declines in all three major U.S. indices, and a clear sense that another week without a bailout would be a disaster.

Looking forward to next week, it seems highly likely we will have a bailout deal in place. It isn't perfect, but it's better than the alternative of doing nothing, or of spending more time messing about trying to come with something perfect. It also seems likely that the legislation's political passage will not be smooth, with members on both sides of the Congress in the U.S. House and Senate unhappy, irritated, and generally nervous about the proximity of this bailout to the November elections.

At the same time, economic data next week will almost certainly make it clear that the U.S. economy is in recession. It has wobbled on the brink for some time, but there is no way out now that I can see. We will join other major economies that are either already in recessions or on their way there.

Next week is chock-full of economic indicators. On Friday we'll have the nonfarm payrolls report, which will almost certainly be grim (likely 100,000-plus job losses). Also next week, we'll see the S&P/Case-Shiller Home Price Index, plus a September measure of manufacturing activity, and consumer confidence.

Turning to earnings, next week will see reports from Circuit City(CC Quote), Walgreen(WAG Quote) and Steelcase(SCS Quote) among others.

Finally, here are some articles and papers worth reading:

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• Lawmakers Reach Accord On Huge Financial Rescue. (The Washington Post)
• Comparing all the plan iterations in detail by provision. (Click here to download Word document from Rep. Roy Blunt's (R., Mo.) office)
• Black Swans and Market Timing: How Not To Generate Alpha. (The Journal of Investing)
• Why "mark-to-Paulson" accounting won't work. (Bloomberg)
• Barron's tries hard to find reasons to be optimistic, as well as sectors that could benefit from the bailout. (Barron's)
• Nightmare on Wall Street a Setback for Brand McCain. (Advertising Age)
• The Other Crisis: Food, Fuel Prices Pose Continued Risk. (International Monetary Fund)
• What the death of the investment bank means for Wall Street. (The Economist)
• The reckless seizure of Washington Mutual(WM Quote). (Bronte Capital)
• Novelist Margaret Atwood's new book on mythology and debt. (Globe and Mail)
• U.K.'s Bradford & Bingley seized over mortgage issues. (Telegraph)
• Peter Bernstein on not-so-free enterprise. (The New York Times)
• Modeling the impact of the financial sector on the rest of the economy. (Federal Reserve Board)
• Forecasting the Cost of U.S. Health Care in 2040. (NBER)
• George Soros is coming back into vogue. (The New York Review of Books)
• Subprime Portfolios Shrink in 2Q As Loss Mitigation continues. (Inside Mortgage Finance)
• Debunking Derivatives Delirium. (Dallas Federal Reserve Bank)
• IMF Says Crisis Marks Tectonic Shift in Financial Markets. (IMF)
• US Mint suspends sale of 24-karat gold coins. (San Francisco Chronicle)
• How the U.S. became a nation of debtors. (Globe and Mail)
• The incentives of mortgage servicers. (Federal Reserve)
• Can the West Save Africa? (NBER)
• Wilbur Ross: Pass the Paulson plan now. (New York Post)
• Regulators seek to increase confidence in failing Fortis. (Bloomberg)
• Great book presaging current crisis: Plight of the Fortune Tellers. (Amazon)