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The overwhelming feeling I have gotten from most news coverage of the financial/credit crisis is that we could potentially see credit as you and I know it disappear. If people can't buy cars, houses and commercial equipment on credit, it's hard to imagine how the economy would hold up.

But maybe we shouldn't want the economy as we know it to "hold up". We've all heard the ominous note that no great civilization has ever survived without investing in its future. I can't imagine borrowing against that future is any better. If we stopped seeing endless personal and national debt as the norm, maybe we could finally force a course correction, just like increasing gas prices seem to create the surge of interest in non-fossil fuel energy.

After listening to this piece on NPR's All Things Considered the other evening, I began to reconsider my nonchalance about the situtation. Apparently, big personal and commercial purchases aren't the only transactions at risk if credit becomes unavailable. The "financial lubricant" of the economy that I keep hearing about in passing is not the throwaway term I figured it to be.

Commercial Paper is the term for that lubricant, and it literally fuels much of our day-to-day economy. Without it, many businesses would not be able to put gas in the tank or money in employees' pockets on those days when they happen to have more red than black in their check book.

"Let's just say you have Terminix come out and treat your house, you write a check," [Mark Peterson, treasurer of Servicemaster] explains. "Our billing department marks your account as having been paid. What's our cash position? Do you have money or do you need money? Today, our company, we have money.' "

Peterson's company might or might not have cash money the next night. It's no big deal — maybe it needs to buy a lot of termite poison or upgrade its fleet of termite-fighting vans. All companies move between having cash on hand and not having it every day. Some days they have extra money. Some days they need to borrow.

If you're an ordinary consumer, you might use a credit card to bridge the gap. If you're a gigantic company, you use the commercial paper market, a way of borrowing a lot of money.

Listening to this piece -- a collaboration between All Things Considered and This American Life -- it becomes quickly clear that we aren't simply ensuring that Americans will continue to be able to receive jumbo-mortgages and car loans. It appears to me, at least, that we need an insane injection of cash into the market because without it, your grocery store won't have the cash to put Pepsi on the shelves and the bookstore I work at won't have enough liquid money to pay UPS tomorrow when the brown truck shows up with a new shipment of books.

One of the causes connected to us normal folk is huge money market funds that invest in commercial paper (but won't, if they start breaking the buck). If investors -- including people like me, with a few bucks in a steady, boring money market account -- start pulling their money out of the market because the financial world is coming to an end, suddenly this financial lubricant becomes much harder to come by. And this isn't simply a long-term question, amenable to slow decisions. If the market for commercial paper freezes, even for a day, our system of business could come to a screeching halt.

Originally posted to the geek wonk chronicles on Mon Sep 29, 2008 at 12:42 PM PDT.

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Comment Preferences

  •  FDIC limits must be raised immediately... (3+ / 0-)

    Estates and the wealthy are causing a silent run on banks since the 100K isn't enough.  This brought down WaMu and Wachovia and will soon leave us with just a handful of solvent banks.

    The liquidity crisis is real.   The bailout bill by Paulson Bush should not have been the only serious option.   FDIC increase would have been a quick fix, and they did the same damn thing on Money Markets.

    Bush, and his narrow........

    No.  We only do partisanship here, and thus we actually become part of the problem.

  •  Many who opposed this "bailout" are focusing (2+ / 0-)
    Recommended by:
    tidalwave1, Over the Edge

    solely on the equity market and not the credit markets.  You are correct, without credit the U.S. economy would shrink considerably.

    "Nothing is more powerful than an idea whose time has come." Victor Hugo

    by lordcopper on Mon Sep 29, 2008 at 12:49:58 PM PDT

  •  I heard this radio piece too (2+ / 0-)
    Recommended by:
    HarlanNY, Eloise

    It was the first real thing that helped me understand why Paulson and everybody really was so scared, and the bailout is so urgent.  The FDIC has extended protection to MMA, but who knows what will happen next.

    I'm reccing this, and suggesting anybody wanting to know the situation better listen to the NPR piece right away!

    by Buffaloflank on Mon Sep 29, 2008 at 12:51:40 PM PDT

  •  You are exactly right. This is the problem. (2+ / 0-)
    Recommended by:
    Eloise, SciVo

    It's about the little things that we forget about - like paychecks and groceries and medicine that will effect us all.  Heaven help us is what Warren Buffet said.  He's right.

    Here's a complimentary diary to yours, that I wrote just minutes ago.  

    Good diary.  Hopefully their is still time for them to pull something off.  The good news is that China and Germany have banking holidays this week.  That might buy us an extra half day to work out a deal.

    I'm glad to hear people are starting to catch on:

    After listening to this piece on NPR's All Things Considered the other evening, I began to reconsider my nonchalance about the situtation. Apparently, big personal and commercial purchases aren't the only transactions at risk if credit becomes unavailable. The "financial lubricant" of the economy that I keep hearing about in passing is not the throwaway term I figured it to be.

  •  FDIC-type insurance for commercial paper??? (1+ / 0-)
    Recommended by:
    FundaMental Transformation

    Would there be any way to have an insurance program for commercial paper?  The users would pay an insurance premium based on their Dun & Bradstreet rating plus the maturity length of the paper, or some other way to judge the risk.

    •  I think the CDS- credit default swaps - (0+ / 0-)
      - were an attempt at that.  Survey says: Massive Fail.

      •  I'm pretty sure those are... (1+ / 0-)
        Recommended by:
        FundaMental Transformation

        used to pass the buck on BS mortgages that nobody wants to pay for. You bundle together a bunch of mortgages (good, bad, ugly) and get somebody to buy a share in that bunch. Insurance for commercial paper would be a whole separate issue, and I honestly have no idea how it would work.

        •  I think you are confusing - (0+ / 0-)
          - 'asset backed securities' with 'credit default swaps'.  

          CDS are a form of insurance (i.e. hedge) related to the asset backed securities and other paper in case of defaults.  They proved to be worse than worthless.  It's part of what is making the mortgage securities paper even more toxic than they were on their own.

          •  Fair Enough (1+ / 0-)
            Recommended by:
            FundaMental Transformation

            But I still get the feeling you're talking in the realm of BS mortgage securitizing, as opposed to the more legitimate market in Commercial Paper I talked about above. I think KLS was wondering about insuring commercial paper, given its apparent necessity in our lives.

            •  The problem is the legitimate market- (0+ / 0-)
              - for commercial paper has been overrun with illegitimate strains.  That's the only reason I say that it likely cannot be insured as it stands. The bad paper needs to be taken out of circulation until values can be assessed. Until that point - American investment paper across the board has lost it's appeal.

              I know that the insurance idea is the route the House repubs want to take.  But honestly, it sounds like more of the same that got us here.  No offense to you or KLS, that's just my feeling to the question that was put out there.  I could be wrong.

              I do think the commercial paper system needs to be remedied, and I very much appreciate you going into it for us.  I'm just not sure that insurance is a workable way at this point.  

  •  How's that working out for ya now? (0+ / 0-)

    Fire Fire Fire
    Weapons of mass destruction
    Terror Terror.
    Your all going to die if you don't bend over and kiss your ass goodbye.

    The people have been abused by the very mechanism that is normally the safety valve/check and balance that would save his/her life.

    Looking for Good Reason

    by Clzwld on Mon Sep 29, 2008 at 02:09:17 PM PDT

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