More Discussion of Why the Bailout Bill Will Not Help Money Markets, Commercial Lending

More Discussion of Why the Bailout Bill Will Not Help Money Markets, Commercial Lending


Reader FairEconomist left a short comment on an earlier post which we hoisted along with some other material, on why the bailout bill could make the illiquidity in money markets worse. He left a longer comment j that sets forth the issues, as he sees them, in more detail.I hope readers do not mind my failure to add my own observations, but I found this discussion to stand on its own (and I think my value added is greater in cranking out some other posts!). Further comments very much appreciated.For new readers' benefit, commerical paper is short-term unsecured paper, up to 270 days, but most is 30 to 90 days (there is also asset backed CP, but that's not the subject of discussion here). Large companies and banks use it actively to manage short term cash needs. It is good practice to have commercial paper backed up with a standby line of credit at a bank. Thus, if for some reason a company cannot roll maturing CP (ie., sell new commercial paper to replace maturing paper), they will use their bank back-up line. Those lines, when used, require a lot of equity relative to other bank products, and of course, also require banks to hand out cash when they worried about extending credit. So even when companies can solve their short-term funding needs by turning to their bank instead, it puts a further strain on already stressed banks.
Click here for full article:http://www.nakedcapitalism.com/2008/10/more-discussion-of-why-bailout-bill.html

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