Well, this is unfortunate. From this morning's Journal:

The credit markets are seizing up again amid new anxieties about the global financial system. ...

Short-term credit markets are still performing better than they did last year thanks to government programs to buy commercial paper and guarantee short-term debt. But Libor, the London interbank offered rate, a common benchmark interest rate, has crept up over the past weeks, from 1.1% in mid-January to 1.3% on Friday, reflecting banks' concerns about being paid back for even short-term loans. It is still well below its peak of 4.8% last October. ...

Not as terrible as the Journal story makes it sound, but not good either. The story goes on to make the seemingly obvious point that mixed messages from Washington are exacerbating the situation:  

"The only way to invest is to guess at which way the winds in Washington are blowing, so capital is frozen," says Sean Dobson, chief executive officer at Amherst Holdings LLC, a mortgage-market trading and investment firm. ...

In a report over the weekend, analysts from J.P. Morgan Chase & Co. said they had expected government intervention to help protect the interests of bondholders at financial institutions. However, they noted that "in the extreme, losses can be so large that the political willpower to continue bailing out banks and insurance companies evaporates, forcing senior creditors to share in losses or producing other unorthodox outcomes."

Now let's stipulate that, all things being equal, the market would be calmer if the government had a coherent, transparent, easily communicated plan. But it's not like the Obama administration doesn't know this. The reason we don't have one is that they haven't gotten their arms completely around the problem yet, and the costs to unveiling a lousy, ill-formed, potentially counterproductive plan are significantly higher than the costs of taking another month or two to get it right (or at least as right as they're going to get it).

The question is, given that reality, is it a net plus or minus for the government to have done what it's done so far. And, despite the impression you'd get from the peanut gallery on trading floors across America, it's pretty hard to argue that bondholders would be better off without the government playing the role it has. Back to the Journal:

At AIG, bonds of the insurance giant's subsidiaries last week traded at prices ranging from 38 cents on the dollar to around 81 cents, from more than 50 cents on the dollar a month ago, according to data from MarketAxess. As AIG's bailout package has swelled to over $170 billion from $85 billion last September, investors have grown worried that future restructurings could cause cash generated by AIG's units to be diverted to pay off the government before its bondholders, say analysts.

Uh, right. And those bonds would be trading for how much if the government hadn't pumped $170 billion into AIG? The obliviousness of the bond trader is truly breathtaking.

Oh, and then there's this:

Some traders say they only trust securities that have the explicit backing of the government.

Bonds issued earlier this year by Goldman Sachs Group Inc. and General Electric without the government's backing have dropped to 96 cents on the dollar and 73 cents on the dollar, respectively, in recent days. Their government-backed debt trades at or close to their full value of 100 cents on the dollar.

Hmmm....

--Noam Scheiber