I thought we solved all this last week

Bloomberg reports that the Fed will buy all commercial paper to ease credit crunch. That’s at least $1.6 trillion, over and above the paltry $700 billion we’re spending to save the banks. Thank goodness for printing presses, eh? Let’s just hope we don’t suffer a shortage of wheelbarrows or we won’t be able to carry our paychecks home from the bank.

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  1. Anonymous

    In Germany during the thirties, they left the cash and took the wheelbarrow – it was worth more than the deutsche marks. Let’s hope that’s not what our future holds. We all know how that ended…

  2. Anonymous

    OK, I don’t disagree about the “moral hazard” and inflation risk, but the Fed isn’t buy ALL commercial paper. They are just offering to buy (e.g. lend to) companies that are having trouble borrowing. They are not going out to the market and buying everything that is outstanding. So it’s not $1.7 trillion. I do not know how much they’ll end up lending, but it is for FUTURE borrowing (who knows how much, but probably a couple hundred billion), not for the borrowing that has happened already ($1.7 tril)

    Were this not done, borrowers like GE and many, many other companies would not have been able to re-pay their original investors when they wanted to “roll over” their debt.

    Make sense?

    CEA

  3. Chris Fountain

    Heck, what do I know? But here’s what the Bloomberg article says:
    “The central bank’s special purpose vehicle will be big enough to backstop the entire market, one official said on condition of anonymity.

    Issuers will be able to sell commercial paper to the Fed up to the average amount they had outstanding in August, an official said.”

    I admire GE and would hate to see it suffer in this panic so if this is what it takes …. But that’s how we were persuaded to accept paulson’s original plan, no? That doesn’t seem to be working so now we’re on Plan B. What’s Plan C?

  4. Anonymous

    CF, there are SO many causes of the financial distress that there cannot possibly be one solution.

    If you had a house with a leaky roof, mold in the basement, a 2-foot pothole in the driveway, and peeling paint, you can’t just fix the paint and sell it at a full price. You’d have to fix the roof, abate the mold, and maybe fill in that pothole (or give a credit to the buyer to do so).

    Here are just SOME of our current problems:

    1. Big borrowers can’t get any credit and risk not being able to repay their CP borrowers. Solution: Fed “backstops”

    2. Commercial banks have huge mortgage debt, some of which is going bad at an alarming rate. Solution: Treasury “bailout” plan

    3. Investment banks like Bear Stearns may go bankrupt, taking down lots of others. Solution: Federal Reserve “backstops” the debt

    _________________________

    Everyone is deleveraging. From the biggest banks to the smallest homeowners. NO ONE WANTS DEBT. So with everyone selling off lots of debt – you need a buyer…. and there aren’t lots of them.

    This is kind of tied into mark-to-market. The Fed and Treasury are saying “Yes, we KNOW the market for your assets, right now, is 0. But we are willing – to get the economy moving – to make the bet that it WILL be worth more in the future. It is in our national interest to do this.”

    While I don’t know anyone willing to say Mariani’s financial solvency is in the ‘national interest’ and taking Meadowcroft off his hands for $12 mil, what is happening now is the bank equivalent of 100,000 Mariani’s, so there is only one entity that can take that on – the nation itself.

    I don’t agree with what has happened, because while it bails out the institutions, it allows to go free the managers who put the institutions there in the first place. THAT is who I think needs to get hauled before Congress – the executive and compensation committees of all these publicly-traded banks. THEY are the ones who signed off on strategy, comp, and asset valuation. They were the enablers.

    Anyhow, I must work so I can retain my job.

    CEA

  5. Chris Fountain

    Try this link for a discussion of the issue;
    http://www.theconglomerate.org/2008/10/the-fed-cant-le.html