Of rescues and diminishing returns: James Saft

By James Saft

LONDON (Reuters) - The market's reaction to the new super bailout follows a familiar pattern: relief, disappointment and the need for a higher dose of the same medicine.

Don't expect risk appetite in most financial markets to be sustained; the "make it better" narrative many investors were betting on ignores an extremely difficult outlook for earnings and what amounts to a global recession of unknown depth and duration.

The equity market never truly got to grips with exactly how bad the banking crisis was, so looking to it to mark its end probably doesn't make sense.

In the market that matters most -- short term loans between banks -- the international plans to inject capital and guarantee liquidity show promising signs of success on narrow but important grounds. Interbank lending premiums are coming down and the banking system did not fail.

The scope of the plans is simply amazing. A hodgepodge of measures in Britain, the U.S. and Europe include equity injections into banks, varying guarantees of bank liabilities like deposits and interbank lines and, breathtakingly, unlimited provision of liquidity to the banking system.

Even with all that it is difficult to expect investors to continue to take on more risk.

Since the beginning of the crisis, through multiple rescue plans, interest rate cuts and culminating in the historic injection of state capital into banks and the guarantee of much of their operations, the market has greeted each new initiative with joy only to swing lower as concerns about the capital base of the financial system again grew