Why $700 Billion?

One of the more noteworthy exchanges in yesterday's Senate hearing went down between New York's Chuck Schumer and Henry Paulson over why the Treasury needed $700 billion all-at-once versus something smaller but still huge, like $150 billion.

Schumer: Could the system work if we put in the legislation, say, this is the first tranche and by January 15th -- just pick a date -- Congress will come back and reexamine?

Paulson: I think that would be a grave mistake--

Schumer: And why?

Paulson: Because I think what this is about is market confidence and having the tools to do the job.

Huffington Post's Sam Stein asked three economists what they thought of Schumer's proposal with one supporting and the other two backing Paulson's need for another Bazooka.

In further testimony this morning Fed Chairman Ben Bernanke expanded on how the $700 billion number came about.

"It's not science," Bernanke said. But there are roughly $14 trillion in outstanding residential and commercial mortgages and five percent is also roughly the loss rate on those categories, he added. Five percent of $14 trillion is = $700 billion.

Intrade is giving an 80 percent chance that a bailout will be passed by Sep 30, but what happens if the Congress doesn't act?

"Having created the expectation in financial markets there will be a package, if there's no package whatsoever, there is very substantial risk of utter financial market chaos," said CBO director Peter Orszag in separate testimony.

Looking to money market spreads, it does seem that conditions have not improved and have actually continued to worsen since last week. Here is the Libor-OIS spread as of this morning:

And the rate on the 1-month New York Funding Rate has moved ahead of the 3-month rate (4.05 versus 3.99) for at least the second day.

Orszag also said that in a best-case scenario, the bailout could work in weeks, not months.