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.