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September 26, 2008

A Reader Says I'm Right

Andrew Sullivanesque, I know. I'm not posting this to gloat. I'm posting it because I thought the things Monty mentions here as having changed his mind were already widely known. I'd mentioned them enough (or so I thought). But perhaps I didn't. So understand that's the only reason I'm posting this.

This isn't a stock market crisis, it's a credit crisis, and without credit, many businesses will simply lay off all but a skeleton staff and/or shutter their doors completely.

That little ACORN giveaway in the bailout bill just convinced me all over again that my opposition is justified. Or at least it was. In the last few hours I've spoken with a friend who used to be a professional money manager, and the loan manager at my credit union (I was calling about an unrelated matter, but she's a very nice lady and we got to talking about the Economic Troubles), and I'm hearing some pretty scary shit from them.

First, the problem is not the stock market. It's the credit market. Specifically, the market for short-term commercial paper. These are the IOUs that big companies pass around to fund their daily operations. When that market dries up, businesses starve for want of short-term cash. They may be perfectly healthy in all other respects, but without short-term liquidity they suffocate and die. I always knew that, but I didn't understand how dependent both banks and corporations had become on this kind of finance. A credit freeze means that no only will banks not lend to each other, but neither will corporations offer these IOUs: not because they can't pay back the loans, but because the buyers are hoarding their own cash and aren't willing to put it at even minimal risk right now.

A lack of operating capital means that companies can't pay their operating expenses, including payroll. Banks cannot loan money because they are afraid of becoming overleveraged. A frozen credit market means that cash does not move: the ecomony grinds to a halt as the "gas" runs out.

There are lots of theories on how to break up this logjam. Paulson and Bernanke simply want to buy up the logjam and get it out of the way, thus undamming the river of credit. This Democratic "stimulus" is a (misguided) attempt to allow the river of credit to flow over or around the blockage.

I have become convinced that something dramatic needs to be done to loosen the credit markets -- I didn't realize how critical the situation was until I heard it directly from people who deal with it on a professional basis. It's bad. I am no happier about Paulson and Bernanke's plan than I ever was, but I find myself hoping that the Fed, the Treasury, and the Congress can cobble something together over the weekend. If they fail, the situation may go beyond bad to truly nightmarish. I only wish this was hyperbole -- it's not. This is a veritable tsunami of really bad shit bearing down on us.

Ace, I owe you an apology. You were right and I was wrong.


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posted by Ace at 11:32 PM

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