Market melt-up

Stocks markets surged yesterday, as Reuters reports.

The Dow Jones industrial average rallied 936.42 points or 11.08 percent, to close at 9,387.61. The Standard & Poor's 500 Index also scored its largest single-day point gain ever -- surging 104.13 points, or 11.58 percent, to 1,003.35. The Nasdaq Composite Index advanced 194.74 points, or 11.81 percent, at 1,844.25.

Crude oil prices jumped more than 4.0 percent along with other commodities, and euro-zone government debt prices fell as the European banking system rescue, designed to shake a global credit crunch out of a deep freeze, removed a flight-to-safety bid...

MSCI's all country world index surged 9.52 percent, its biggest one-day percentage gain in at least two decades. The index's market value increased by $1.7 trillion...

The FTSEurofirst 300 index of top European shares closed 10.1 percent higher at 937.41...

Asian stocks jumped more than 7.0 percent, according to MSCI's index of Asia-Pacific stocks outside Japan, after tanking more than 20 percent last week to the lowest since December 2004.

The government rescue plans are coming in thick and fast now.

Britain, Germany, France, Italy and other European governments pledged hundreds of billions of dollars to recapitalize ailing banks and boost flagging confidence in the world's wobbly financial system.

The U.S. Federal Reserve, the European Central Bank, the Bank of England and the Swiss National Bank also said they would lend commercial banks as much U.S. dollar liquidity as they needed at fixed rates to restart interbank lending.

In the United States, Treasury Secretary Henry Paulson said Washington was developing plans to buy equity in financial institutions to halt the prolonged market turmoil.

All looking promising for markets.

However, some are beginning to ask how all these programmes will be funded.

As Brad Setser points out: An unlimited guarantee requires unlimited access to financing.

And Willem Buiter asks: Are the fiscal pockets deep enough to save the banks?

The tension between spare fiscal capacity and the funding gap or solvency gap of the national financial system may be such that it can only be resolved either by government default or by international financial support - aid. We will know before the year is over which nations’ governments will have to be bailed out if their national financial systems are to be bailed out.