All About That Paper

The New York Times reports that the Fed is now looking to intervene in the “commercial paper” market where many business receive short term unsecured loans to help maintain cash flow. If I understand this correctly, businesses use commercial paper to pay expenses during periods of temporary cash restriction. For example, let’s say a business knows they will receive payment on the 30th through their billing apparatus, but they need money to pay for “widgets” on the 20th. To address a potential cash shortage, the business dips into the commercial paper market to bridge the gap. Apparently, this practice is fairly common and perhaps more importantly, represents one area of convergence between “Wall Street” and “Main Street.”

I’m hardly qualified to make an informed opinion on this, but it certainly sounds necessary. That said, intervention does seem plagued with side effects.

To pay for its burgeoning responsibilities, the Fed has no choice but to keep printing more money. To prevent that flood of new money from reducing the central bank’s overnight interest rate to zero, the Fed also announced on Monday that it would start paying interest on the excess reserves that banks keep on deposit at the Fed.[…]

[…]But the effort is fraught with legal complexities. Though the Federal Reserve has sweeping power to create money and lend it out, experts said it was normally prohibited from buying assets that could lose money.

Again, this topic is light years outside of my comfort zone, but these potential snags coupled with the unprecedented nature of this plan does seem to reinforce the burgeoning “Whack-A-Mole” meme explained here:

But so far, the myriad efforts by government regulators to shore up confidence have seemed to yield little relief among investors, some of whom believed the actions have taken on a haphazard air.

“People are slowly but surely coming to the realization that playing ‘Whack-a-Mole’ with each of these issues as they arise, on an ad hoc basis, doesn’t get the job done,” said Max Bublitz, chief strategist at SCM Advisors, an investment firm in San Francisco.

This does in fact appear worrisome. With each measure growing in size and complexity, it’s hard to see where we’re headed next. Buckle up.

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