Tuesday, October 7, 2008
FED'S MASSIVE INTERVENTION IN THE COMMERCIAL PAPER MARKET
Although Bernanke was initially slow to respond to the developing credit crisis, I believe that he is doing everything that he can do now. He initially played down the scope of the problem but started to reverse his position by interest rate cuts in August 2007. I was very encouraged to read this morning that the Fed had created a facility to buy massive amounts of commercial paper. Yahoo! Finance The commercial paper market is used by companies to provide short term financing for their operations and it is one of the credit markets that have quit working properly. The Feds facility is called the Commercial Paper Funding Facility (CPFF) which will provide a liquidity backstop to purchase three month unsecured and asset backed commercial paper directly from eligible issuers. Hopefully, this will eliminate the risk that the issuers will be unable to pay investors when the short term paper has to be rolled over and thereby encourage investors to buy the paper and to re-engage in the commercial paper market. This is a radical idea for the Federal Reserve. It does not solve the root of the problem but it does relieve a credit jam in the system that could have led to substantial negative effects on the economy.