Archive for October, 2008

Why Credit Remains Tight

Friday, October 10th, 2008

It’s October 10, 2008, and for the last two weeks, world credit markets have been seized with illiquidity, or whatever you’d call the opposite of liquidity … dryness, I guess.  Credit has grown stiff and creaky.  The cost of short-term lending has shot up.

Treasury Secretary Henry Paulson has made clear that the rapid increase in the cost of short-term collateral-free borrowing between banks, businesses and other banks — a.k.a. the “commercial paper” market — is the doomsday scenario that all the world’s governments should now fight to prevent.

And central bankers around the world are reaching further agreement that reducing the cost of credit is an urgent goal to prevent a global financial meltdown, and that to do so, we must infuse banks with cash.  Billions and billions of dollars, euros and yen of delicious money.  This has been Paulson’s argument for some time, but now other G7 financial analysts are coming to the same conclusion.

Funny thing is, we’ve been doing this for a little while now, we’ve kept on infusing and infusing and infusing the banks with cash, and yet they keep raising their commercial paper rates.  This is the opposite of how it’s supposed to work, apparently.  The cash infusions are supposed to assure everybody that nobody’s going broke.  They are supposed to remove uncertainty, and reduce panic.  It’s like they’re supposed to spend the cash on Valium, but they’ve been buying up crystal meth instead.
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