He is a loyal MR reader, but that doesn’t mean he always carries good news:
My question:
When the Fed backstops the Commercial Paper market by entering it and offering a "risk free" counterparty to companies, is it crowding out private lending? I also feel like the same could be true of the Treasury. If the Treasury offers to buy the toxic MBS on the books of private companies, they lose all incentive to deal with private counterparties that are not risk free…
I know that the government is trying to encourage credit to flow. In some way it seems like they are impairing the flow by making markets on risk free capital.
Boo hoo! The ideal, of course, is that the people who need riskless assets can hold riskless assets and pass their funds along to those who can profitably lend funds out to riskier borrowers. That’s not where we are right now. To put this more concretely, if the Fed is not buying or backstopping your commercial paper (and they’re not touching mine), maybe now it’s harder to make your way in the marketplace.
David, by the way, poses the thought experiment of ceasing to issue T-Bills but suggests that might bring Armageddon.
or alternatively, the fed (and other central banks) end up as de facto clearing houses for the money markets & therfore remove the distrust that is the primary cause of the current spikes in lending rates…
I assure you that Treasury’s intervention into the MBS market has killed/stalled at least 2 relatively mature deals.
I believe the Fed’s intervention into short term credit will retard the Great Deleveraging and slow (but not stop) progress into our new era of traditional interest rates.
I sometimes think that if we had left Iraq after capturing Hussein, the amount of blood spilled would have been the same but telescoped into a shorter period. And that might have been better.
And the market was down how much? With each massive market intervention, the desired effect seems harder to achieve; the law of diminishing returns.
The people I see getting screwed are the companies that have OK but not great creditworthiness. The Fed will buy CP from the people with toxic ratings, anyone with cash will be buying A-1 rated CP, but companies would be apprehensive about stuff with OK ratings.
So private companies will buy up the good stuff, the Fed will buy up the bad stuff, and the guys in the middle are left holding the bag.
At least I am assuming the Fed is only buying CP from companies that are big credit risks.
This has been a lot like watching a train crash in slow motion. There’s nothing you can do to stop it and the momentum clearly signifies the magnitude of the calamity….
An now McCain wants to spend $300 billion more on homeowner mortgage buyouts. Hey, after the first trillion, a few hundred billion more is easy! Maybe Palin will get that bridge to nowhere for Alaska…
Some data some of your readers might be interested in:
http://www.iq.harvard.edu/blog/sss/archives/2008/10/dol_visa_data_r.shtml
When the Fed backstops the Commercial Paper market by entering it and offering a “risk free” counterparty to companies, is it crowding out private lending?
This is a similar theme to what has happened and is happening in Europe. When a bank gets in trouble, and the government steps in to guarantee its deposits, everyone scrambles to move their cash to the guaranteed bank. This causes five otherwise solvent banks to fail. Lather, rinse, repeat. Eventually, you’re guaranteeing the entire banking system, your currency loses half its value, and you’re negotiating $5 billion loans from the Russian mafia.
Beyond the technical aspects, which I’ve been wondering about as well, why are they doing this at all? They should just be concerned about bank solvency. At what point along the way did they forget that mothering the entire economy isn’t their job?
Hope you’ll click on my name below and check out The Forbidden Theory of Redistribution.
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