Does House Republican Resistance Make Sense for Their Constituency?

From the Justin Fox, regarding House Republicans’ plan:

…that of the House Republican Study Committee, seems to be a joke. It calls for a two-year suspension of the capital gains tax to “encourag[e] corporations to sell unwanted assets.” But the toxic mortgage securities clogging up bank balance sheets are worth less now than when they were acquired. Meaning that no capital gains tax would be owed on them anyway. If you repealed the tax, banks would have even less incentive to sell them because they wouldn’t be able use the losses to offset capital gains elsewhere. Seriously, where do these people come up with this stuff?


Eric Cantor, the Republican chief deputy whip, has a more reasonable-sounding if still pretty vague plan to insure more mortgages rather than buy mortgage securities. ….

I’m in agreement with Justin that guaranteeing even more mortgages won’t be any better than the original Paulson plan.


My observation here is that the obstructionism of this group is either a manifestion of denial of reality, or a sheer indifference to the needs of their constituents — to the extent that House Republicans purport to represent small business Main Street.



TED.gif

Figure 2: TED spread, accessed on 9/25 from Bloomberg.

From CNBC:


Small Business Struggling As Credit Dries Up


Posted By:Kenneth Stier, Sep 25, 2008

While most of the nation’s attention is focused on saving behemoth financial firms, small businesses are struggling to ride out a perfect storm of tougher credit conditions in a badly hobbled economy.


The result is that the finance sector’s woes — which has spawned new lending prudence — is exacerbating, rather than relieving, economic weakness.


Even government programs designed to help small business are falling down on their mandate just when they are needed most, says small business advocates.


“It’s always been difficult for small business but now it is become almost impossible” to survive, say Marilyn Landis, chairwoman of the National Small Business Association (NSBA). “Many factors are coming together to make this a perfect storm for small businesses.”


Until recently most small business owners could go to their local banks and get unsecured loan of $100,000 or more but those days are long gone.

In the past, owners could put up buildings or equipment for loans needing collateral; similarly service companies could post solid track records of positive cash flow.


But under sharply tightened lending standards these are no longer any guarantee to get needed funding.


Besides, with so much manufacturing having migrated offshore there is less equipment to use as collateral, and property values have plummeted around the country.


As a consequence, small businesses are now using bank loans — far preferable than relying on credit cards — is at a 15 year low.


Sixty percent of domestic banks reported having tightened standards on commercial and industrial (C&I) loans to medium and large firms, according to the Federal Reserve Bank’s July survey of senior loan officer’s opinion on their lending practices.


But for small firms, terms tightened even more. Lending standards to small firms were raised on C&I loans at 65 percent of banks, up from 50 percent in April.


Some 32 percent of small business survey by the NSBA said they were experiencing worsening bank terms, forcing many to use credit cards more.


That’s more convenient for banks—which can shift debt off their books to a handful of credit companies – but it subjects borrowers to higher rates and terms that can be changed at will.


In an August survey, 67 percent of small business owners reported worsening credit card terms—up from 57 percent in February.


All this has added to small business owners being “extremely anxious” about the prospect for recession, according to a recent NSBA survey, which found 79 percent anticipating a recession or flat growth at best.


“Even the perception of such limitations on small business sector translates into prolonging the recovery of the US economy,” says the survey.


This is critical because small businesses are responsible for 93.5 percent of net new jobs created in the US since 1989, according to the NSBA.


The trade association’s survey says near-term prospects for new net job is stagnant.


“It”s a tighter market, it means it takes a little longer, there is a more scrutiny, consumers have to jump through a few more hoops to get that loan,” says Tracey Mills, a spokesperson for Consumer Banking Association. “And it’s a good thing because banks just want to make sure that whoever gets the loan, will have the ability to repay.”


Co-mingled credit histories


One of those new tighter hoops is tighter scrutiny of credit scores.


But that particularly complicates small businesses because many owners’ personal and business credit histories are co-mingled, with the debt businesses normally have to carry pulling down overall scores.

Another indication of the freeze, from Thursday’s FT:


On Tuesday, the US Federal Reserve quietly admitted that it had been temporarily unable to calculate yield levels for non-financial commercial paper, issued by AA-rated companies for one to three months.


The problem, it seems, was a dire lack of activity; or, as Morgan Stanley says, “extreme levels of stress and illiquidity”. More specifically, while investors are still purchasing ultra short-term notes — say, for one or two days — on a massive scale, they are reluctant to buy instruments that last longer than a few days. That may be temporary (yesterday yield prices were apparently returning to the AA sector again although they were unusually high). However, even a temporary freeze is remarkable. After all, these non-financial companies typically have nothing to do with Wall Street or toxic mortgage debt.

In other words, the spreads are not just rising; at some maturities in some instruments, markets have disappeared, albeit briefly (for now).


Returning to the CNBC article, I found most startling this statement (I never thought I’d agree with a statement from the US Chamber of Commerce, but these are unusual times):

“Main Street and Wall Street are inextricably connected,” said Bruce Josten US Chamber of Commerce executive vice president, urging Congress in a letter Wednesday to act quickly on a bailout out package to stem further market damage. Failure to act, he warned, would make the harm already will in retrospect seem “only the tip of the iceberg because a lockup in credit markets will cripple Main Street’s ability to operate and threaten taxpayer jobs and income.”

See also this post, as well as

So if we end up delaying until households and small firms individually experience the credit crunch directly for the sake of ideology, well, we’ll know where to locate the responsibility.

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35 thoughts on “Does House Republican Resistance Make Sense for Their Constituency?

  1. 12many

    “Sixty percent of domestic banks reported having tightened standards on commercial and industrial (C&I) loans to medium and large firms”
    This is bad? Shouldn’t it be 100% Isn’t credit just resetting to reintroduce a reasonable assessement of risk. Isn’t the whole problem that risk assessment has been absent. Sure, loans will be more expensive but hasn’t easy credit created all these problems. I just can’t understand how buying bad loans resolves the problems – seems like it would just prolong the misallocation of capital. Other than credit tightening – as it probably should – exactly what crisis are we facing? I have not seen it explained, and Paulson et al certainly haven’t clarified anything. This is like the war in Iraq – secret information, that cannot be divulged, makes these actions necessary.
    Bush said “this sucker is going down” if we don’t get the bailout. What does he mean?

  2. Thad

    Maybe you haven’t been paying attention, but the phones of Congressmen have been ringing off the hooks with constituents telling them “DO NOT PASS THIS ACT”.
    With the election just weeks away, it would be suicide for any congressman to vote for this act.

  3. Stuart Staniford

    There is plenty of time between now and the election for the financial crisis to get much much worse than it is if the government doesn’t credibly backstop the situation one way or another.

  4. Billy Bob

    Main Street here. Remind me again why we need to give $700B to the banks so that they can lend it back to us?

  5. SvN

    Billy Bob:
    University Avenue here.
    Go watch “It’s a Wonderful Life.” This time, pay attention to the bit about bank runs.
    Now go talk to an Argentinian; ask them what it was like to wait in line for hours at the only functioning ATMs. Ask them about the riots. Ask them about how the economy did. Ask them whether they feel that politicians let them down in allowing the crisis to happen.
    Now go talk to the Swedes and the S. Koreans. Both had nasty banking crises in the 1990s. Both recovered quickly. Ask them how they did it.
    Here’s a suggestion; don’t give the $700B away. Invest it in bank stocks, esp. the undervalued ones.
    Here’s another suggestion. Go back to school.

  6. CoRev

    The “Bail out” proposal went from three pages to over forty pages after the Dem’s, Harry Reid, said no one knew what to do. One sticking point seems to be the Dem proposal to take 20% of the return of the assets once sold, and assign them to more mortgages for the poor and adding that 20% to the Nat debt. Isn’t that the issue, unsecured or risky mortgages, that got us into this problem?
    There always were alternative ways to “bail out” the financials, but Dems abdicated their responsibility, and accepted the Paulson/Bush proposal. From a political stand point the Dems are in a corner having accepted the admininstration proposal unfavored by most voters, and the Repubs can now propose an alternative that is favored by the voters and claim they have protected them from those greedy SOBs. [Pick your target here.] With just a modicum of success they will be heroes. This move could salvage several seats in the Congress and maybe even a presidential candidate. Brilliant political [and maybe even economic] move.

  7. DickF

    Menzie,
    The Democrats don’t need the Republicans to pass the Bush plan if that is what they want. So why don’t they? Simple, they are afraid to lead. They don’t want to take the heat alone. They know that their phone calls are running 99 to 1 against the plan.
    So let’s look at this claim of a credit freeze. This is from Robert Higgs http://www.independent.org/blog/?p=201
    Although certain financial institutions are undeniably in deep troubledifficulties of their own making, we might addthe problems in particular financial circles should be kept in perspective. Note especially that credit markets in general have NOT ceased to operate. Moreover, lenders are extending credit in historically great amounts. To see this reality, however, we must break away from anecdotes in the financial press, which is eager to attract readers, and from fear-mongering by the political class, which is eager to seize more power, and examine the data that describe wider market transactions. For this purpose, the St. Louis Feds Web site is a useful resource.
    Commercial and industrial loans of all commercial banks, which are reported monthly, have grown rapidly. The most recent report, for August 2008, shows outstanding loans of $1,514 billion, an all-time high. This loan volume is 15.5 percent greater than it was a year earlier, and 30.8 percent greater than it was two years earlier. Frozen credit?
    Consumer loans at all commercial banks, which are reported monthly, have also grown rapidly. The most recent report, for August 2008, shows outstanding loans of $845 billion, an all-time high. This loan volume is 9.2 percent greater than it was a year earlier, and 16.5 percent greater than it was two years earlier. Frozen credit?
    Even real estate loans at all commercial banks, which are reported monthly, grew rapidly until very recently. The most recent report, for August 2008, shows outstanding loans of $3,642 billion, only slightly below the all-time high (in May 2008). This loan volume is 4.1 percent greater than it was a year earlier, and 15.5 percent greater than it was two years earlier. Frozen credit?
    Lest one suspect that I have cherry-picked my examples, consider finally the amount of all bank credit at all commercial banks, which is reported weekly. For the most recent week reported, the one that ended on September 9, this credit amounted to $9,406 billion, which is only slightly less than the all-time peak of $9,485 reached in the week that ended on March 26, 2008. For the past six months, total commercial bank credit has remained on a high plateau, well above the levels reached in previous years, when everybody seemed to think that credit was ample.
    It seems pretty obvious that this is a crisis created by the wise me of Washington and now those same wise men are using this crisis to take more from us and acquire more power over our lives.
    The only place that credit is frozen is on Wall Street. As was proven by the classical economists there can be no economic calculation with Socialism. The intervention of government into these transactions especially through Fannie and Freddie have once again proven that these economists knew what they were talking about as their manipulated markets have frozen solit. The new economists (Bernanke, Paulson, Pelosi, and Reed) manifest the Greek definition of hubris as they attempt to defy the natural law of markets.

  8. markg

    Menzie,
    Treasury securities are usually issued to cover deficit spending. In effect they are created from “nothing” and leave the public with the same amount of money (the public must buy the newly issued treasury security but gets that money back when the govt deficit spends). In the “bailout” case, the Treasury is again creating Treasury Securites with no cost to the public, but this time they are swapping them for other bank assets. Of course, taxpayers must pay interest on the Securities, but last I checked 3 month bills are yielding near 0%. Even the 10 year is under 4%. And the interest payment is really just a redistribution of money within the private sector. I am sure those people who work for the financial institutions that will receive the interest also pay taxes (matter of fact, I would much rather pay the taxes to cover interest on the Treasury Securities to keep them and many other Americans employed than I would pay taxes to cover unemployment checks; or worse yet receive an unemployment check). So why is this a “taxpayer” bailout?

  9. Anon

    Bush said “this sucker is going down” if we don’t get the bailout. What does he mean?
    We are talking about a total disaster.
    I think our government experts understand and are screaming “fire” as loudly as they can.
    The problem is people who know nothing about the size or scale of the problem. People who, unlike Ben Bernanke, have not studied the Great Depression….are clueless. All they see is spending tax payer money. They enjoy the power tehy wield without understaning what it means not to have access to water when Wall Street is on “fire”.
    Rock solid businesses will not be able to get loans rolled over…many at this moment are having experiencing restricted credit all of a sudden (and soon will have trouble paying suppliers and employees). This fire is going to destroy a lot more than Wall Street.
    Why is this not obvious to anyone by now is unfathomable.

  10. MattJ

    The minority party in the House cannot stop a bill. Period, end of story. Blaming this bill from passing on House Republicans is ludicrous. The minority party in Congress postures; that is pretty much all they can do. The Democrats spent a decade doing this, they should know it better than anyone.
    From all reports, they had the Republican President and 40 Republican Senators on board. That is more than enough for it to be seen as a bipartisan bill. The Congressional Democrats wanted to load up the bill with all their nonsense and then still be able to label it as Bush’s bailout, a Republican bailout that they reluctantly went along with. They do not want it to be seen as a bipartisan bill.
    Nothing in the last two years has shown more clearly how unsuited Pelosi is to lead the House.

  11. Anarchus

    Anytime the government claims that you have to vote for this one proposal, right now, or the world will end tomorrow, I’ll take the “end of the world tomorrow” every time.
    Paulson and Bernanke have grossly mismanaged this credit crunch into a crisis of historic proportions over the past 9 months, and now they have the hubris to say with complete confidence, “we know what’s best and you have to follow our recommendation right NOW”. Gross and utter nonsense.
    Mark-to-market accounting has been the precipitator of the most extreme downleg of the crisis, yet Paulson and Bernanke are for it, still. Why not consider getting rid of THAT? For as William Isaac pointed out in the WSJ recently, back in the 1980s every single money center bank in the US had either negative or ZERO equity on a mark to market basis, but because that wasn’t the law of the land (or FASB is you prefer) the banks and the financial system had the leeway to ride out the storm.

  12. Jeff

    In other words, the spreads are not just rising; at some maturities in some instruments, markets have disappeared, albeit briefly (for now).

    And in other, adjoining, maturities, issuance of AA nonfinancial CP is running at twice the usual rate. The data are publically available, see
    http://www.federalreserve.gov/releases/cp/volumestats.htm.
    While there was no paper issued on Friday or Monday in the 81+ days category, which usually runs at about $100 million, there was $410m of 41-80 day CP issuance on Friday and $137m on Monday. The usual levels here are in the $150m-250m range, so this is substantially above normal.
    So just where is this credit crunch, again?

  13. ReformerRay

    As Mark Twain said, the death of the U.S.economy has been greately exagerated.
    The Federal Reserve Board is aggressively sending money overseas to supply dollars to foreign markets for short term cash.
    As long as the Treasury can sell notes and bonds for less than 4% and that money is funneled back into the short-term markets, the credit system is not going to freeze.
    At least 6 more months of falling house prices are needed to get house prices down to a level appropriate with local incomes. So, sit thight for 6 months, horde your cash, watch the value of your stocks decline and advocate massive government expenditures on capital improvements near the end of 2009.
    McCain has done us a favor by helping to destroy the Barney Frank – Paulson mistake.
    If you just cannot refrain from action, do something constructive,like creating temporary conditions that will help get us through the next 6 months, without allowing the villians to escapt their punishment. Establish ANOTHER fed agency, to receive and manage those toxic mortgage contracts that investors do not want to sell right now and that they would like not to clog their balance sheet. While these contracts are “parked” with the Fed agency they cannot be sold and they cannot be marked-to-market. Instead, their market value will be, by law, frozen at the value they had when deposited with the Fed agency. When the owner reclaims her contract, it will be marked to the current market.
    In exchange for this help, the owner of the contract will agree that the fed agency can reduce the payments by an amount up to 20% of current payments, if, in the judgment of the Fed. agency, this is likely to avoid foreclosure.
    In addition, all contracts deposited will receive a subsidy of $20 each month they are managed by the Fed.
    This fed agency will provide employment for people formerly employed by private agencies to manage their contracts – at reduced wages.

  14. colonelmoore

    I am no expert on the pros and cons of the bailout. I have been following such people as Henry Blodgett on the bailout. He thinks that the approach being taken is totally wrong and in the above link suggests the preferable alternative. It might be easier to sell the alternative to the voters, because according to him wipes out the risk takers that created this mess without wiping out bank lending. I don’t know whether the GOP is following this path or not, but it is worth following in the next few days.
    http://finance.yahoo.com/tech-ticker/article/73110/McCain%27s-Brilliant-Play-Bets-Presidency-on-Blocking-Bailout-Deal?tickers=
    Unfortunately, due to the partisan bickering that permeates the comments on this board, it will be difficult to rationally discuss the merits of what Blodgett has been proposing. This is made more difficult by the fact that he frames it in terms of the ongoing political fray.
    But it seems that if the goal is to keep the banking system itself solvent while punishing the risk takers for their bad bets, his approach would go a long way toward doing this.
    Discuss. And of course do not hesitate to put a lot of chaff in the wind by muddying the waters with partisan slams.

  15. tjgje

    Jeff, Your argurment would be stronger if you also included the interest rates associated with your figures. Your data is also consisitent with the credit crunch hypothesis because the fear of counterparty default has reached the point where lenders are unwilling to extend a loan for more than 80 days. Also, if you aggregate the 41-80 and 81+ you get an averge dollar volumen of $500m – $700m for the combined 2-day period. You indicate $547m in lending over the 2-day period, a number toward the lower end of range.
    If there is no credit crunch then why has the FED pumped 100+ billion of liquidity into the market to soak up all the commercial paper selling that the money market funds are doing? Why didn’t the market take care of it? Why did the fed funds rate shoot up above 5% last week? Why is the TED spread so high?

  16. MarkS

    I’ve got a radical solution to the credit crisis… How about having the FED expand the number of money center banks into well run, well capitalized state and regional banks. Then, the FED can expand credit to main street through banking institutions that actually loan the money, rather than distressed banks holding it for Treasury bond arbitrage. I’m a true believer that competitive banking forces will rapidly backfill the hole that the current system has dug for itself.

    Its inevitable that overbuilt residential and commercial real estate will continue to decline in value. This will be exacerbated by liquidity contraction as derivatives deflate, demographic changes as baby boomers retire and downsize, and fuel cost inflation that will make long commutes and heating costs for much of the present housing stock uneconomic.

  17. praetorian

    MarkS,
    Lunacy! Letting the free market work itself out and allowing obviously incompetent banks suffer the consequences of their decisions?
    It would never work. Goldman would go out of business, and we all know that Paulson won’t let that catastrophe happen to the people of the United States of America.
    Cheers,
    prat

  18. Boat52

    Debt reached an unsustainable level given the underlying cash flow to support it.
    Until there is robust job creation in the U.S. and an increase in real incomes, the crisis will not be solved.
    All attempts by Congress will not be effective.
    No country in history gained prosperity following the path that the U.S. is currently on.

  19. Anon

    The $64 trillion dollar question!
    Can James or Menzie (who we all respect) please explain to those that think America should simply pull the plug on Wall Street (no bailout) – what would likely happen in the conflagration?

  20. Buzzcut

    What does it mean to insure more mortgages? Like PMI?
    How did the requirement that those putting less than 20% down have PMI stop the subprime crisis?
    It didn’t. So why would it work now?

  21. Dan Weber

    How did the requirement that those putting less than 20% down have PMI stop the subprime crisis?
    I’ve been asking this for a while, and finally got an answer. Apparently MI has greatly dwindled in favor of combo loans.
    New legislation has been/will make PMI premiums deductible like a combo loan is, so maybe the pendulum will swing back.

  22. GK

    I oppose the bailout. I was neutral until today, but I see that small and medium-sized banks are NOT in trouble. This tells me that large banks should be allowed to fail.
    Maybe the government can help the unwinding happen in an orderly fashion, but no bailout.

  23. matt

    “My observation here is that the obstructionism of this group is either a manifestion of denial of reality, or a sheer indifference to the needs of their constituents.”
    Their job is not to address the needs of their constituents; instead, it is to address the wants of their constituents (which can be different than their needs). If you believe the media, it sounds like constituents are largely against this bailout.
    Also, why do you have such a belief in the trickle-down effect? Anyone who supports this bailout is saying two things: 1. If we give Wall Street a bunch of money, some of it will make it to “Main Street.” 2. The housing crises can be solved if the banks can be recapitalized to… let people borrow more money.
    1. is unfair and short sited because it implies that Wall Street getting richer is good for Americans
    2. is really insane. If people are having trouble paying their debt now, what happens when more credit is extended? You hope that the new credit is only extended to people with good credit, but that doesn’t really address the real issue of home prices that have run away from incomes
    Since we’re being insane, how about a trickle – up bailout theory. Instead of giving the banks a bunch of money, how about we just do a 700 billion stimulus package–based on the last one (150 billion), that means that I get a $2800 check instead of the 600 check I received last time. Some of it will trickle up to Wall street and then everyone is happy.

  24. Mr. K

    wow. I checked in to see what these guys had to say about the bail out…and was correct, they would be in favor of this massive expansion of government. what I did not expect was so many commenters opposed to it, as I am. I know what the root causes are – stupidity and greed. If we have a bailout, I know who will pay – me. But I also do not trust the people involved. Washington politicians who created the mess, along with a former Goldman-Sachs CEO? Why should we trust them at all, with their description of the problem and the proposed solution?
    Those bad mortages are backed by real property. Someone will buy them, and make money. And the institutions who held the bad mortgages, will belly up. And the people who get foreclosed upon will end up renting the houses they should never have tried to buy in the first place.

  25. RebelEconomist

    Anon,
    Why would it be such a problem for banks to fail and be seized by the government (as in Sweden) for an orderly wind-up or recapitalisation and sale? Wamu’s deposits were just taken over by JPM and there was no problem. You need to be more specific to be convincing. My default position is that a bank’s capital is its first line of defence, and that should be depleted before using public money, partly to minimise moral hazard and partly simply to save public money. I can appreciate that a solution is urgently needed, but not necessarily the one originally offered.

  26. 12many

    “We are talking about a total disaster. I think our government experts understand and are screaming “fire” as loudly as they can.
    The problem is people who know nothing about the size or scale of the problem. People who, unlike Ben Bernanke, have not studied the Great Depression….are clueless.”
    Let’s see: WMD in Iraq [Bush]; subprimed “contained” [Bernake]; economy healthy and strong [Paulson, about March]. For some reason, I’m starting to get cynical. Were they lying to us (for our own good, no doubt), or are they the clueless ones. So Bernake studied the Great Depression? Just swell. Maybe he needs a remedial class or two.

  27. Scott

    It’s all moot. By monday the market will have already cleaned this mess up. Wachovia will be bought, Morgan Stanley will be bought. Add to this WaMu being closed/bought, Countrywide bought, Bear Stearns bought, Lehman BKed. Basically all of the domestic bad actors are out of business or have married to institutions in a better capital position. The healthy banks have eaten the unhealthy. The banks with capital and a capacity to digest losses have assumed the toxic mortgage waste. No more systematic failures, although some small regional banks (downey savings) will also go under.

  28. aaron

    I’m starting to feel pretty confident the bailout is a bad idea. You can’t magically make risk go away. It will still exist, we’ll may get more inflation, and money will go into goverment paper instead of capital investment.
    The reason the value is low isn’t a lack of cash. It’s because cost of living has gone up, asset value have gone down and incomes have remained flat or declined. That big house doesn’t look worth it when you can’t save or eat the foods you’re used to.
    People need to realize there is no such this as a risk free return. If they want to make money, they need to take a chance and invest in people doing things. Money needs to come out of commodities and go into people and capital. I don’t see the bailout doing that. I think it will do the opposite.

  29. Jeff

    tjgje writes:

    Jeff, Your argurment would be stronger if you also included the interest rates associated with your figures.

    The rates paid on commercial paper are available at the same site. Go to the link above and look at the top of the page. Click on the link labeled “Release”. What you’ll see is that the rates paid by Nonfinancial AA issuers are very low, the rates paid by AA financial companies are mostly about 50 to 100 basis points higher. Poorly rated borrowers (A2/P2) and asset-backed paper are charged much more.

    Your data is also consisitent with the credit crunch hypothesis because the fear of counterparty default has reached the point where lenders are unwilling to extend a loan for more than 80 days.

    Let’s be clear what we’re talking about here. There are elevated counterparty default fears, but they are entirely justified, as the Lehman collapse shows. There is nothing wrong when uncreditworthy borrowers can’t get a loan. That’s how the system is supposed to function. I don’t call that a credit crunch, just a recognition that the big banks with their Level 3 assets, CDO’s and phony credit default swaps (because there’s no money behind the underwriters) have been lying about the true state of their business. Now that we’re finally starting to get a little transparency, that game is up.

    Also, if you aggregate the 41-80 and 81+ you get an averge dollar volumen of $500m – $700m for the combined 2-day period. You indicate $547m in lending over the 2-day period, a number toward the lower end of range.

    Sheesh, did you even look at the table? Look at the weekly figures for AA nonfinacial issuance. If you average the two most recent weeks (ending Sept 19′th and 26′th) the volume of paper issued for every maturity except 81+ is well above the annual averages for 2006, 2007 and 2008. Even the 81+ number is above the annual average for 2006. There’s just no evidence here of a disaster in the offing.

    If there is no credit crunch then why has the FED pumped 100+ billion of liquidity into the market to soak up all the commercial paper selling that the money market funds are doing? Why didn’t the market take care of it? Why did the fed funds rate shoot up above 5% last week? Why is the TED spread so high?

    The big financial companies are finding it difficult to borrow, due to the correct perception that they are much less creditworthy than most thought a few weeks ago. But as best I can tell, their problems are not having much effect on anyone else. They are not lending to each other, but they are lending to creditworthy nonfinancial firms. Today’s Washington Post business section has an informative story to the effect that small and medium community banks are swimming in cash, and are making loans as fast as they can find creditworthy borrowers. These are the lenders to small businesses, and they are doing very well.
    As for why the Fed is trying to save the big banks and reckless money funds, your guess is as good as mine. It is striking that aside from the politicians, the only people who think this is a disaster are the Wall Street millionaires and some at the Fed who seem unable to distinguish between the interests of the big financiers and the nation.

  30. ReformerRay

    “Today’s Washington Post business section has an informative story to the effect that small and medium community banks are swimming in cash, and are making loans as fast as they can find creditworthy borrowers. These are the lenders to small businesses, and they are doing very well”.
    I found the same kind of article in The Columbus Dispatch.
    Seems to me that we are doing just fine. The companies that created the problem are suffering and the companies that were responsible have cash to lend and they will make money as the cost of credit increases.
    I do not want to see the firms that created the problem be refinanced. New firms will emerge.
    Less credit is needed. The U.S. is moving to an economy that does not depend upon debt for profit.
    It is my fervent hope that this bailout is not passed for weeks and we will learn that all the people who predicted a meltdown were wrong.
    What we will see is more loses in the stock market, increases in the cost of credit. If the well intentioned folks who did not take the time to define the problem correctly are thwarted, the bottom will arrive quicker and the recovery will begin earlier.

  31. Anonymous

    Jeff – I support your view that small business owners can get cash.
    This wailing about changes in the way money is supplied to the short-term market does not realize that Central Banks are now providing the dollars all over the world that the private banks are not willing to supply. The private market costs, etc. are irrelevant. The question is whether or not the FRB can continue to supply
    the dollars to the short term market.
    I see no reason to panic just because Bernanke did.

  32. Another Anon

    “The $64 trillion dollar question!”
    Anon, I’d like to take “Credit Default Swaps” for $800B…

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