Now that the Congress has voted against the Treasury bailout and the Dow has dropped700 points, the important question is whether they system can save itself before the market moves toward 9,000. That would wipe out over five years in gains.

The Treasury may move into the market with a combination of a rapid rates cut and an even larger increase in its commitment to buy Treasuries. That purchase program would have to move into the hundreds of billions of dollars very quickly.

Without private capital driven by low interest rates, it is hard to imagine the situation improving before early next year.

It is impossible to say how much bold money is on the sidelines. Sovereign funds in Asia and the Middle East would have to believe that they can get good returns from buying certain financial shares and live with the fact that those returns may be two years or more away.

Capital is not completely locked down. Buffett has put money into Goldman Sachs (GS). Morgan Stanley (MS) sold a 21% interest to Mitsubishi UFJ Financial. Citgroup (C) clearly believes that it has access to capital or it would not have taken over most of Wachovia (WB)

At some level, private equity, vulture funds, and the most well-off venture funds would have to move into the market. This is not likely unless the Fed cuts rates to zero and allows these enterprises "safe" leverage.

If the Fed pushes rates to a level where there is a tremendous incentive to drive a modest increase in investment and sharply improves the chances of a return on capital, the private enterprise system might save itself without the Treasure writing checks.

Douglas A. McIntyre

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