David Murphy makes me weep

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. 


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