I did not make it clear, probably because I was not clear myself, on how exactly “credit freeze” will bring the economy to a grinding halt.
I heard another NPR segment co-produced with This American Life yesterday. They spoke to a few a people. One of them is the financial officer of Terminex’s parent company. The company uses commercial paper (called the most liquid part of the financial system) almost daily. The simplified explanation is to borrow 99,000.00 and return 100,000.00 a few days later. This is how many many companies make payroll and pay creditors. It is supposed to be a very boring part of finance, often handled by clerical level people when borrowing, seized up. His company could not burrow anything. He thought that our financial system would collapse if it went on for few more days. That is what got Pualson and Bernankie so spoofed. Then they talked to a banker at the receiving end of these loan requests. According to him, the reason the commercial paper market seized is because the oldest Money Market fund “turned a buck”, lost money, earlier in the week. Money Market pays extremely low interests, but is not supposed to loose money. The fact that one did spooked everyone, so no one is willing to lend.
What the feds/treasury are really trying to do is to instill sufficient confidence so that normal lending will occur, not the over leveraged crap that got us into this mess.
A poster thought this credit freeze is bankers withholding lending to force a bailout, I have to say that is a bit too “conspiracy theory” for me. Do you really thing bankers have that much control over each other?
Anyways, I don’t play a financial genius, even on internet. I am only passing along things that make sense to me.
