Things on the eco­nomic front still look very bad out there, what with a stock market in free fall, Ice­land on the verge of bank­ruptcy, and, oh, did you hear that we’re pump­ing another $38 bil­lion into AIG? It’s all ugly, and it’s prob­a­bly going to get worse and stay bad for some time.

But there’s a few little tiny bits of good news that Yves Smith res­cued from the rubble yes­ter­day. First, the credit mar­kets are start­ing, ever so slowly, to loosen up. Here’s Smith:

It is way to early to take cheer, but some of the stress in the money mar­kets is back­ing off a bit. The TED spread is below 4, and ten year credit swap spreads were down to 45 basis points, which is a seri­ous improve­ment and a gen­uine pos­i­tive sign.

Part two of the semi-​sweet news is that the Trea­sury Depart­ment may have fig­ured out that it needs to do what Smith, Nouriel Roubini, and Paul Krug­man have been trying to tell it to do for a couple of weeks now: namely, recap­i­tal­ize banks directly. Here’s today’s New York Times on the new plan, again via Smith:

Trea­sury offi­cials say the just-​passed $700 bil­lion bailout bill gives them the author­ity to inject cash directly into banks that request it. Such a move would quickly strengthen banks’ bal­ance sheets and, offi­cials hope, per­suade them to resume lend­ing. In return, the law gives the Trea­sury the right to take own­er­ship posi­tions in banks, includ­ing healthy ones.

The Trea­sury plan, still pre­lim­i­nary, resem­bles one announced on Wednes­day in Britain. Under that plan, the British gov­ern­ment would offer banks like the Royal Bank of Scot­land, Bar­clays and HSBC Hold­ings up to $87 bil­lion to shore up their cap­i­tal in exchange for pref­er­ence shares. It also would pro­vide a guar­an­tee of about $430 bil­lion to help banks refi­nance debt.

The Amer­i­can recap­i­tal­iza­tion plan, offi­cials say, has emerged as one of the most favored new options being dis­cussed in Wash­ing­ton and on Wall Street. The appeal is that it would directly address the wor­ries that banks have about lend­ing to one another and to other customers…