Unknown terrain for economy.

Unknown terrain for economy (State of Massachusetts denied credit)

Source: Boston Globe
In an example of how fragile credit markets have become, the state of Massachusetts yesterday tried to borrow $400 million to make its routine quarterly local aid payments to cities and towns. State treasury officials said the credit markets abruptly froze midday, leaving them $170 million short. The state will have to use its own funds to complete the local aid payments, draining the state's balance to extremely low levels.

"I don't think any treasurer alive could say they've ever seen anything like this," said Timothy P. Cahill, the state's treasurer. "There have always been cash shortages, but you could always go to the market and get more. This is the first time we haven't been able to do that."

Cahill said he believes the credit market will in effect remain shuttered today as the nation's largest lenders hold on to their cash amid uncertainty over plans for a federal bailout. In short, the House's rejection of a $700 billion Wall Street bailout plan takes Massachusetts and the rest of the US economy into territory that few policy makers and analysts wanted to explore.

It tests the forecasts of Federal Reserve chairman Ben Bernanke and Treasury Secretary Henry Paulson that failure to approve the plan will dry up credit markets, damage the financial system, and send the fragile US economy spiraling into a deep recession. The economy may yet muddle through, analysts said, but the risks of a catastrophic downturn have risen. LinkHere