Slog News & Arts

Line Out

Music & Nightlife

« The Henry Has a New Web Site! | Liveblog Tonight »

Tuesday, October 7, 2008

The Fed Moves to Save the Commercial Paper Market

posted by on October 7 at 9:15 AM

I demand a solution for the short-term credit crisis, and the Fed delivers. (Fear my power, and the power of SLOG!)

The Federal Reserve will create a special fund to purchase U.S. commercial paper after the credit crunch threatened to cut off a key source of funding for corporations.

Today’s action follows a slide in the commercial-paper market to a three-year low of $1.6 trillion last week as investors fled even companies with few links to the subprime mortgage crisis. Companies from newspaper firm Gannett Co. to electricity producer Southern Co. have been forced to tap credit lines or forego raising debt because of the market’s disruption.

The Fed’s efforts are aimed at “stemming the bank-run-like panic,” said Mark Gertler, a New York University economist and research co-author with Fed Chairman Ben S. Bernanke. “The immediate threat to the real economy is that large corporations are having difficulty obtaining funds via the commercial paper market.”

This should help big companies, those large enough to seek short term debt on the market directly. And it seems to be working.

For small companies, that more typically borrow via lines of credit from a bank, things still sound pretty ugly. (If you own a company or work for a company that is suffering because of having a line of credit frozen, please email me at

I like this move. Ben Bernanke, the current chairman of the Fed, seems sharp. Unlike Treasury secretary Paulson, he’s never worked on Wall Street. In the least, he’s an expert on the (first) Great Depression. Seems to be useful right about now.

RSS icon Comments


Good move, but a fraction of what's needed.

30 trillion is my estimate of the "missing money".

Alan Greenspan made us use virtual bucks for real bucks for 10 years by keeping a tight rein on the money supply.

Now we're paying the price and will do so unless Bernanke makes those virtual bucks real.

Posted by John Bailo | October 7, 2008 9:24 AM

Bernanke cut interest rates too much, too fast. Rather than letting problems surface so congresfolks would be forced to address them, he delayed the panic by injecting liquidity into a broken system. Now he's got a massive slowdown on his hands and little ammunition left to deal with it.

Said, he's better than that crony Paulson.

Posted by tt | October 7, 2008 9:27 AM

#3: Wrong, absolutely wrong.

Interest rates should almost be negative at this point. We need to get capital to Joe Sixpack and the classic Internet Startup of 2000.

Remember, although the Fear Mongers keep pushing the idea of Recession, it still hasn't happened.

It's basically just a tough time for Rich Guys. That's why the most disgruntled group in America are those making over $100K.

Meanwhile, WalMart workers are King!

Posted by John Bailo | October 7, 2008 9:33 AM

850 bil down the drain for something that the Fed could have done all along.

Posted by Bellevue Ave | October 7, 2008 9:33 AM

Take your meds, John Bailo.

Posted by Fnarf | October 7, 2008 9:35 AM


I still have those photocopies of the magazine cards. Do I need to press with the FBI case?

Posted by John Bailo | October 7, 2008 9:36 AM

I have really enjoyed having conversations with my uncle over the past 8 years -- he's an economics an economics professor who used to work for the government in the 60s/70s. It's interesting to get someone's perspective who knows a hell of alot more about economics than I do, and who is able to be somewhat objective about the situation.

Recently, he said that Paulson is a complete idiot, but Bernanke is one of the greatest economic minds in Washington and that he's generally on board with what he proposes. He also said (about 4 years ago) that Bush was the worst thing to ever happen to this country, from an economics perspective.

Posted by Julie in Chicago | October 7, 2008 9:44 AM

yes jonathan, your powers have done wonders so far...

helped with the run on deposits at wamu "even though it's safe!" and now even more tax payer dollars to clean up this mess....

Posted by jonathan helped with the wamu deposit panic | October 7, 2008 9:48 AM

@7: The Economist agreed with him in 2004, which is why they backed Kerry. It's sad when the Economist is backing the Democrat, but that is what you get when you have a party of Neo-Cons.

Posted by Original Monique | October 7, 2008 9:48 AM

This might have the effect of unfreezing interbank lending with the Fed as a surrogate for banks lending to one another and issuing commercial paper. But it will only last a short time.

The root of the problem is that banks are either insolvent, or on paper bankrupt (assets are less then liabilities) and thus will continue to not trust one another for short term lending, at least as far at the US and Europe is concerned.

So, what happens when foreign investors pull the plug on the Fed's debt (e.g. China) when they decide that the Fed is also in similar shape as the commercial banks? What, you say the Fed is indestructible? You say that it cannot collapse under the weight of bad mortgages, rolling over commercial paper to banks that may or may not be solvent, or that matter, industrial enterprises that will feel the weight very soon (can't wait for those fourth quarter reports), and (coming soon) the popping of the derivatives bubble? How many CDSs are still out there that will have to call in their chips in the next six months? Letting Lehman go was the tipping point for this accelerated downturn, and there is little evidence that suggests that bailing them out would have helped avoid the situation we currently face and will face.

Not only that, history has shown (see 1931) that when central banks act independently of others in a global economy there is a backlash, and that money is flushed down the shitter. Say goodbye to 700bm. Watch as Europe economy tanks and continues to pull us down in its echo. Watch it bounce over to the Asian markets and back again.

People need to get out of the mentality that this or that action is the quick fix. Anyone who says that such and such will help is blowing smoke, because the only thing that is sure is no one really knows how this will unfold. As the Economist magazine pointed out nearly a year ago, no one knows that extent of exposure of all of these securities based on bad loans, the CDS problem, and where the chips will fall in the manufacturing sector. Oh, wait, the US doesn't really have one; thanks, Reaganomics and NAFTA.

Think savings and loan collapse, only on a global scale, spreading outside the finance sector. GM just idled two plants in Europe. Boeing is getting scared. Look for more of that.

This is big. And we are really fucked. Please do your readers a service and actually report on what can be done by them to protect themselves. Get a real business reporter that knows something about economics, even local economics, for starters.

Posted by tpn | October 7, 2008 9:56 AM

Wind, meet piss.

Posted by tomasyalba | October 7, 2008 9:56 AM

@6: what the hell are you talking about?

Or did perhaps one of your many Usenet antagonists (all of Usenet, basically) sign you up for NAMBLA Monthly or something? Which must have been so annoying for a dedicated recycler like you, seeing as how you already got a copy on your own.

Face it, John Bailo: everywhere you ever go, everywhere you've ever been, all you ever do is antagonize and annoy everyone you come across. Why is that? What is it about your personality that leaves you friendless and alone in a crappy apartment on the East Hill of Kent, struggling ineptly, and unsuccessfully, to interact with people on the internet?

You and Will in Seattle should get married.

Posted by Fnarf | October 7, 2008 10:03 AM

@10, so what *can* be done by us readers to protect ourselves? move all my money to some foreign currency? stock up on ammunition? move to canada? sell my condo and buy a ranch? do tell.

Posted by knowledge | October 7, 2008 10:08 AM

If you aren't voting for Ron Paul on Nov. 5th you are participating in your own demise.

Posted by Bryan | October 7, 2008 10:15 AM

@12, I'm not a huge fan of "let's build 100-story buildings with surrounding 'greeeeeen space' that magically won't be anything like Cabrini Green ghettos" Will in Seattle, but wishing Bailo on him is just cruel.

Posted by lily | October 7, 2008 10:25 AM

@15: yes, it is.

Posted by Fnarf | October 7, 2008 10:29 AM

Where has WiS been lately, anyhow? Did he retreat to the forums? Take up a new handle? Wherefore art thou, WiS?

Posted by where's WiS? | October 7, 2008 10:35 AM

Ok, as long as we're in agreement. :D

Posted by lily | October 7, 2008 10:36 AM

Yes, I think we are long overdue for a WiS v. Fnarf exchange.

Posted by Julie in Chicago | October 7, 2008 10:38 AM

Anybody watching the Bernanke testimony on CSPAN? Or the AIG inquiry on CSPAN2 or whatever?

Posted by tomasyalba | October 7, 2008 10:49 AM

Like Alan Greenspan, Bernanke is doomed by a fatally flawed, rigid economic ideology.

The economic theory they subscribe to states that recessions and depressions are largely caused by a lack of liquidity. We're gonna find out first hand if that theory is correct.

A competing, less widely accepted theory--considered complete heresy by the likes of Greenspan and Bernanke--is that wealth has become far too concentrated in too few hands. In other words, you can't have an economy based on consumer spending if consumers don't have adequate wages and money to spend. The rich already spend whatever they want--that's what it means to be rich--so that's why there is no "trickle down" effect.

The only solution in this case is wealth redistribution and equalization through tax increases for the rich and massive investments in infrastructure and education.

By the time all this is done, all Bernanke will have left is a desperate wish for a quick, painless death.

Posted by Original Andrew | October 7, 2008 11:46 AM

And there's another thing: I was at Southcenter this weekend (massive mall/shopping area for those of you outside SEA), and every store and restaurant was packed balls-to-the-wall.

Yeeesssiirrree! People were totally shopping their brains out! We couldn't even find a parking space at the mall and gave up!

This is not the behavior of a people staring down an impending financial apocalypse, and it sure as hell doesn't pass the already ridiculously low bullshit threshold for the Bush Administration.

Are people so ignorant that they have no idea what's going on? Or, are things really not as bad as the DC/Wall Street Hysteria Pimps would have us believe?

Posted by Original Andrew | October 7, 2008 12:05 PM

I hereby declare the Boomer Generation shall now be called the Bust Generation.

Posted by crazycatguy | October 7, 2008 12:17 PM

That's funny, I was at Southcenter last weekend, too, and it WAS balls-to-the-wall. We parked as far away as I've ever parked at a mall. That new H&M is like a squirming mass of hormonal youth, packed in tight. I had to hie off to Macy's for a boring new tweed jacket and a rather nice tie. Come the apocalypse, one must be decently dressed.

Posted by Fnarf | October 7, 2008 12:18 PM

Ross Dress for Less is really pretty cool, too. The downtown store is a polyglot joy.

A follow up from the AIG bailout hearings, as reported by NYTimes. This is like the Bluth Company at Lucille's mercy.

"In addition, the former A.I.G. executive who led the London-based division whose implosion is largely blamed for the insurance giant’s downfall, Joseph Cassano, continues to receive $1 million a month from the company, on top of the $280 million he received in the last eight years."

Posted by tomasyalba | October 7, 2008 12:22 PM

@25: I always preferred the homophonic "Raw Stress for Less." It has the added benefit of applying to a much wider range of retail emporiums.

Posted by rob | October 7, 2008 1:19 PM

@21: The rich-poor divide is a symptom of bad economics, not a cause.

The Austrian School of economics says that inflation is fraud that benefits the rich by hurting the poor, and cutting the Fed rate creates inflation.

A primer on the Austrian interpretation of the boom-bust cycle:

  1. The Fed cuts rates to "stimulate" the economy.
  2. Banks borrow cash from the Fed.
  3. Because fractional reserve banking is legal, each $1 borrowed from the Fed becomes $10 worth of loans that the banks can lend out.
  4. Businesses see easy loans and low interest rates so they invest in equipment or real estate, hoping for future growth.
  5. The suppliers of that equipment and real estate make profits, and pass some of that to their employees. The "boom" begins.
  6. The employees are happy with their current savings — savings are a cushion against risk, and risk seems to be the same as before — so they spend the new cash.
  7. The stock market sees a boost in consumer confidence and profits, so investors dive in and create a "bull" market. Bernanke gets out the champagne for a "job well done".
  8. The inflation, originally created by fractional-reserve bank lending, now drives up prices as the money circulates — there's more money chasing the same number of goods and services, so prices must rise or there will be shortages.
  9. The Fed hikes interest rates to "cool off" the economy and "fight" inflation.
  10. Consumers see that prices have risen, and realize that their savings aren't as big as they thought they were — the same number of dollars now protects against less risk.
  11. Consumers lose confidence and cut spending to improve their risk cushions. The "bust" begins.
  12. Businesses discover that the expected increase in sales never materialized permanently — and, worse, interest rates have hiked on those loans made waaay back at the start of the "boom". They discover, to their surprise, that they made bad investments and are losing money.
  13. The bad investments become apparent to the public, resulting in a "bear" market as investors pull out.
  14. The Fed cuts rates to "stimulate" the economy....

Because of the time delay between banks creating money and prices actually rising, people who get their hands on the money first benefit the most. In order, these are the government itself, the banking industry, the large businesses that receive loans early in the "boom" (and manage to pay them off before interest rates rise), and the businesses that profited from the loan-induced buying spree at the start of the "boom". Very, very last to benefit are people working blue-collar jobs... and people on a fixed income (the unemployed, retirees, and so on) never benefit at all, and only suffer from the down sides.

Posted by Chronos | October 7, 2008 2:09 PM

@3: Due to fractional-reserve banking, negative interest rates would create hyperinflation and collapse the US Dollar, similar to what's happened in Zimbabwe. Baaad idea.

Posted by Chronos | October 7, 2008 2:17 PM

Comments Closed

Comments are closed on this post.