We don’t necessarily share Senator Max Baucus’ (D-MT) unequivocal optimism–“We have turned the corner and we will begin to see this financial crisis begin to abate”–but will give him a mulligan because he was quite clearly caught up in The Greatest Deliberative Body in the World’s skill for glorious self-congratulation. And everybody came to celebrate a bill nobody likes.

Wednesday evening’s vote on a revised version of the US Emergency Economic Stabilization Act of 2008 was the first step in a legislative process that now runs through the House and then on to the White House. President Bush said shortly afterward that he’d sign it. House leaders need to come up with a dozen more votes, but the Senate rescue comes in a nicer package designed to appeal to members on both sides of the aisle.

Republicans and Democrats alike may enjoy the temporary boost in the limit on federal deposit insurance to USD250,000 from USD100,000; to boot, banks won’t be required to pay additional premiums for the coverage, which expires in 2009. Covering more cash will quell ordinary people’s fears and stabilize deposits for banks.

And a two-year extension of breaks worth USD149 billion to individuals and corporations during the next 10 years provides combined with relief for 24 million households from a USD62 billion alternative-minimum tax due to take effect this year to provide good cover for the committed tax cutters. It could also provide a little stimulus for an economy heading for recession. Consumers can use all the help they can get, and easing demands on companies’ cash flows may help stabilize operations.

The political tension during the 36 hours after the Senate vote and before the House vote comes courtesy of a combined USD17 billion in credits for the development of solar, wind and other forms of renewable energy. The Senate included a one-year extension of production tax credits for wind energy, an eight-year extension of investment tax credits for solar energy projects and tax credits for purchasing plug-in electric vehicles. The bill also provides incentives for the use of biodiesel.

A handful of Democrats may be enticed to vote with the party leadership and support the rescue plan, while Blue Dogs will lament the ignorance of “pay-go” principles. But the reaction to Monday’s stock market debacle—777 points and an overnight shift in public (read: fearful 401K holders, retirees, small and large business owners) opinion–probably convinced enough House members on both sides of the aisle to change their minds and get with the program.

The Senate version includes inducements for holdout Democrats and Republicans, but it leaves intact the discretionary authority vested in Treasury Secretary Henry Paulson to use what is essentially a revolving credit facility to buy distressed assets from hobbled financial institutions.

The federal government can pay what amount to above-market prices for assets that essentially have no market right now because its costs of capital are so low. As well, it has the flexibility to keep subprime mortgages, for example, or other securitized paper on its books for a longer time horizon, allowing the loan to actually perform. The government isn’t hampered by the demands of quarterly mark-to-market accounting.

Paulson’s authority also includes the ability to essentially create a market for the securities he pulls from the books of participating institutions. He’ll pay a price up front (a process that could result in the much-desired recapitalization, along Swedish lines, advocated by many economists) and can then, once the risk characteristics are determined (as should have been done by Standard & Poor’s, Moody’s and Fitch from the beginning), put them up for bids by private institutions. It’s not well defined in the legislation, but what Paulson is after here is a mechanism for price discovery–in other words, a market made by the federal government.

The global financial system is a complicated mess. Securitization sand has clogged the system, and someone has to pick it all out. It’s going to be a long process, and we won’t know what the cost to taxpayers will be, if anything, for several years. We will, however, have a pretty good idea of the plan’s success on the short-term goals within a week or two: The immediate bullseye this rescue plan is pointed at is the interbank lending market. That clarity will come from the behavior of the London Interbank Offered Rate (LIBOR) and the TED spread.

Donald MacKenzie, who teaches in the School of Social and Political Studies at Edinburgh University, writing in the London Review of Books, describes LIBOR thusly:

Judged by the amount of money directly dependent on it, the British Bankers’ Association’s London Interbank Offered Rate matters more than any other set of numbers in the world. Libor anchors contracts amounting to some $300 trillion, the equivalent of $45,000 for every human being on the planet. It’s a critical part of the infrastructure of financial markets but, like plumbing, doesn’t usually get noticed.

The cost of borrowing in dollars in London for three months rose after the Senate approved the rescue plan, a sign banks haven’t yet begun to lend again. LIBOR climbed 6 basis points to 4.21 percent, its highest level since Jan. 11.

Financial institutions are hoarding cash to meet future funding needs amid deepening concern that more banks will collapse. LIBOR, set by 16 banks in a daily survey by the British Bankers’ Association, is used to set rates on financial products worldwide, including home and auto loans, loans to small businesses as well as derivatives.

The TED spread is an expression of the difference between the three-month LIBOR and the three-month US Treasury.

The September spike essentially measures the reluctance of banks to lend to one another, represented by a rising three-month LIBOR, as well as an ongoing flight to quality, or demand for the safety of US Treasuries.

We’re unlikely to see spreads decline before confidence has been restored.

In the short term, the bailout bill should help the dollar hold on to some of the strength it’s shown during the recent flight to quality. That should exert some pressure on commodity prices.

A systemic rescue may restore investor confidence to battered financial markets, but the focus will eventually fall on the twin US budget and current-account deficits and negative real US interest rates. The dollar is headed for tougher times.

Expect lower prices for energy in the short term, but that has nothing to do with supply and demand for oil. The long-term fundamentals haven’t changed: Global supply continues to lag demand growth in countries such as China.

Though there are some early signs it may be affected by the slowdown in the US and Europe, China’s economy is still growing strong, and its appetite for crude oil has shown no signs of slowing yet. China consumes almost 9 million barrels per day, roughly equal to Saudi Arabia’s or Russia’s production.

And oil production is on the decline on key oilfields. The Mexican Cantarell field, for example, saw production fall by a third over the past year. Russia, the world’s second-largest oil producer, saw production decline by 0.8 percent and oil exports fall by 5.2 percent year-over-year in the first half of 2008.

There’s less oil in the world, and production is becoming more expensive. And if past behavior is indicative of future moves, major producers will coordinate efforts to keep oil from falling by cutting production.