Second Thoughts on Commercial Paper
I became a big fan of Planet Money during the recent financial crisis. I listened to their simplified version of things and then assumed I knew a lot about it, but lately ctd has been challenging my assumptions.
A key point in the Meltdown narrative of September 2008 is the widely reported freezing of the commercial paper market. This American Life reported a trader saying that "There's no bid in the market for paper. There's nobody willing to transact with each other." There was "probably over a trillion dollars in need" - commercial paper from banks that nobody would buy - as "The river of capital narrowed to a trickle. Money stopped moving." Frontline reported that "Banks stopped lending. The credit markets froze. car loans, loans to small businesses, commercial paper borrowing by large banks." Bloomberg described "the credit freeze that's paralyzing businesses around the world ... The credit markets are effectively shut". The New York Times reported that "In October 2008, the market for that kind of debt all but shut down". Businessweek described the "unprecedented" contraction of the market by $400 billion. The Wall Street Journal explained that "Money funds weren't buying the paper anymore and were dumping it to cash out fleeing investors". There was a "meltdown in this market ... a collapse of the commercial paper market". Slate said that "the commercial paper market seized up. If Lehman couldn't make good on its short-term debt, was it safe to lend money to anybody?"
This broad selection of quotes from serious financial news sources makes this sound pretty serious, right? It's a huge problem for the economy when banks and businesses can't get the money they need. It's even worse when it happens suddenly, without time for anyone to adjust their business models.
Except that the numbers don't seem nearly this bad. The market hadn't "frozen", it had only shrunk by one-fifth since Sept. 10. The Fed's numbers show that there was a big drop in September, but by 25-30%, to 2006 levels. New issues of commercial paper didn't "freeze", they declined slightly and more or less steadily. The rates charged for that paper jumped 50% or so. The cost of commercial paper went to its highest level in eight months. It was expensive, but it cost that much back in January. You can download the raw numbers here and generate all sorts of graphs - which I have. To be honest this seems quite a bit less alarming than the reports make it out to be.
I just want to be right all the time, and in this case I'd like to actually know what to think about the events of September-October 2008. Are these numbers worse than they appear to be? Am I looking at the wrong numbers? Or has ctd just blown the lid off a massive federal conspiracy that successfully bamboozled every independent economics reporter? I admit it kinda looks that way. Then again I'll also admit that Cydonia kinda looks like a face, that the video of the WTC collapsing kinda looks like a controlled demolition, and that some of the 1969 Apollo moon landing footage kinda looks like a sound stage. It isn't, it just kinda looks that way. I'd appreciate a few more eyes on this problem.
A key point in the Meltdown narrative of September 2008 is the widely reported freezing of the commercial paper market. This American Life reported a trader saying that "There's no bid in the market for paper. There's nobody willing to transact with each other." There was "probably over a trillion dollars in need" - commercial paper from banks that nobody would buy - as "The river of capital narrowed to a trickle. Money stopped moving." Frontline reported that "Banks stopped lending. The credit markets froze. car loans, loans to small businesses, commercial paper borrowing by large banks." Bloomberg described "the credit freeze that's paralyzing businesses around the world ... The credit markets are effectively shut". The New York Times reported that "In October 2008, the market for that kind of debt all but shut down". Businessweek described the "unprecedented" contraction of the market by $400 billion. The Wall Street Journal explained that "Money funds weren't buying the paper anymore and were dumping it to cash out fleeing investors". There was a "meltdown in this market ... a collapse of the commercial paper market". Slate said that "the commercial paper market seized up. If Lehman couldn't make good on its short-term debt, was it safe to lend money to anybody?"
This broad selection of quotes from serious financial news sources makes this sound pretty serious, right? It's a huge problem for the economy when banks and businesses can't get the money they need. It's even worse when it happens suddenly, without time for anyone to adjust their business models.
Except that the numbers don't seem nearly this bad. The market hadn't "frozen", it had only shrunk by one-fifth since Sept. 10. The Fed's numbers show that there was a big drop in September, but by 25-30%, to 2006 levels. New issues of commercial paper didn't "freeze", they declined slightly and more or less steadily. The rates charged for that paper jumped 50% or so. The cost of commercial paper went to its highest level in eight months. It was expensive, but it cost that much back in January. You can download the raw numbers here and generate all sorts of graphs - which I have. To be honest this seems quite a bit less alarming than the reports make it out to be.
I just want to be right all the time, and in this case I'd like to actually know what to think about the events of September-October 2008. Are these numbers worse than they appear to be? Am I looking at the wrong numbers? Or has ctd just blown the lid off a massive federal conspiracy that successfully bamboozled every independent economics reporter? I admit it kinda looks that way. Then again I'll also admit that Cydonia kinda looks like a face, that the video of the WTC collapsing kinda looks like a controlled demolition, and that some of the 1969 Apollo moon landing footage kinda looks like a sound stage. It isn't, it just kinda looks that way. I'd appreciate a few more eyes on this problem.