The basic storyline in financial markets remains unchanged today, as everyone waits for Congress to act on the Paulson bailout plan. In the meantime, overnight conditions in the world’s money markets are again approaching the extreme stress levels we saw exactly one week ago. Keep reading…There is a lot of intelligent commentary out there, to the effect that Congress needs not act immediately to pass a bailout bill for distressed mortgage-backed securities (MBS). Paulson, Bernanke, and now President Bush have emphatically made the opposite point, that we have to act immediately.

There would be a lot of benefit from giving this proposal a more considered hearing in Congress, of that there’s no doubt.

The problem is that there’s no time left on Congress’s schedule. They leave town on Friday the 26th to go home and get re-elected. (Whether they should be re-elected is something I can’t discuss without violating the language rules of this site.)

If Congress leaves town without making a deal, and we have to wait for a rump Congressional session in December, we could quite likely have experienced a serious crash by then.

In the meantime, financial markets watch and wait. And interbank lending, which is the core transaction of the global payments system (and the mechanism through which money appears in your account when you cash your paycheck) has steadily become more and more frozen as we’ve gone through the week. Three-month dollar LIBOR will probably be fixed this morning at a rate close to 3.8%.

As a side note, the New York Fed has quietly kept the Fed funds rate (the key American interbank rate) close to 1.5% all week. The Fed’s current target for this rate is supposed to be 2%. I find that pretty interesting. It signals that, in the background, they’re getting worried about the Main Street economy, which is getting weaker even as we all focus on the Wall Street crisis.

I’ve heard from several correspondents that if Congress doesn’t produce a clean bill by Friday, we can expect a very serious reaction in world markets. (“Clean” means: free from oversight mechanisms that will keep the bailout from actually working, and free from a huge pile of handouts to Democratic constituencies.)

For a good part of yesterday, my sources indicate that a deal was close. The action in Congress shifted from open hearings to closed meetings dominated by Democrats in the House of Representatives.

House Democrats know they can put just about anything into this bill, and the President will be unable to veto it. Because Congress will be out of town, the bill can’t become law without the President’s signature.

You will simply not believe the evil and the pork-barrel spending that Barney Frank will put into this legislation. Frank is about to get the biggest set of Hannukah presents anyone has ever received, probably in history. At your expense, dear taxpayer.

Watch his smug, ugly face when you see him on camera over the next few days. A more veritable robber baron has never existed, not even in Wall Street’s most rapacious dreams.

By yesterday evening, published reports had it that any deal would be postponed a few days. That means we need to consider the consequences of a possible financial Armageddon.

The relevant comparison is probably to 1929. The stock market may fall at least 20%, although I’ve heard worse guesses, and commodity prices would likely also fall. The consumer economy would probably slow sharply but temporarily.

The world will survive and recover from a crash, but beyond that, it’s hard to guess at specific outcomes. Still, now is the time to think about the possibility.

-Francis Cianfrocca