Code_Name_D
10-25-2008, 02:00 PM
The myths about the credit “freeze”
Of the resent media scare campaign, the so called “credit freeze” is by far the biggest, baddest boogieman out there. For most members of congress, just the mere threat of a credit freeze was enough to stampede them to voting for the recent $700bill bailout.
The beast is usually described as thus. Corporations need to barrow money on a daily bases for every thing from making payroll and paying venders to buying offices supplies and paying bills. They usually barrow this money from something called the “paper markets”, also called the “money markets.” I have heard the paper market described in several ways, but one that seems to be the most consistent is like a collective interest bearing savings account. Corporations “deposit” their operating capital into the paper market, much like you or I. And just like any savings account, then can pull this money out at any time for basic operations.
But if they pull more money out then they put, this is a loan and they have to pay it back the next day, plus interest. The interest is then divided among every one else who has still has money in the fund. Well that actually sounds rather stable. This is what traditional banks do; they take deposits and issue them out as loans to barrowers.
The “beast”, if you will, is described that these funds will “break the buck.” That is a corporation will pull less money out of their money market accounts than they put in. Right off the bat we know that this not like any conventional savings account that we are familiar with. Apparently, money market funds are still speculative investments. They are to be ultra-super safe investments with virtually zero return, but it’s still an investment that still has risk associated with it. In fact it’s such a risk-free investment that it has never lost money – until now, or at least threatens too.
And this is the claws of the beast. If the money markets “break the buck”, than all the corporations will pull their money out, and the money market “freezes up,” because there is no longer any money to loan out to corporations for day to day operations. Worse yet, corporations will no longer be able to pay their employees and venders. And the economic earth literally stops turning in the ultimate dooms day scenario, or so we are told. Any way, it is for this reason why the banks need to be bailed out to the tune of $700 billion.
But the media has been tight lipped on explaining how the money markets got into trouble in the first place. At first blush, it seems logical to assume that this has something to do with all those toxic securities that have been blowing up on the banks accounting sheets. They then raid the money markets in an effort to cover the holes. But if they are doing this, they are doing so illegally, and the bailout is more than just a racket, but making congress accessory to the crime. (Most if not all are already war criminals, hay why not add to the list?) But to my knowledge, no one is accused the banks of raiding these funds.
For one thing, the money markets are not “frozen.” What they are – is expensive. The interest charged for a “loan” from the paper markets is based on the availability of equity in the fund and the size of the loan. The more money you draw from the fund vs. its existing equity, the higher the interest. If loans start to test the fund, the interest rate paid out goes up, attracting additional investors into the system. So, why are corporations fleeing the money markets?
Answer – they aren’t “fleeing” but disappearing. The economy has turned down. It’s not just we average presents who pay more for food, gas, and every thing else, but business and corporations as well. As a result, they have to deal with tighter budgets; this translates into pulling money out of investments – and running on leaner money market accounts. And less money in the accounts means more expensive barrowing.
Add to that the constant fear-mongering about the frozen-credit markets, and this is bound to send some participants heading for the hills. The fear-mongering has produced a self fulfilling prophecy which surprise surprise, actually came true.
That is not to say that the money markets were in good working order before Bush opened up his pie-hole. The money markets are dependent on a bull market, build on the false assumption that bear markets not only could no longer happen, but that new market “innovations” rendered the vary notion of bear markets obsolete. In other words, even the slight risk associated with money market funds was waved away and ignored by investors. Just like market securities built on sub-prime loans, these risks rematerialized once a bear market asserted itself.
Corporations say that they are risk takers. But truth in fact is that they are extremely paranoid about risk and only invest in sure things. Money markets are said to be low risk, had the players in this market been willing to accept their losses in the market down turn, there would be no crises. But the term “breaking the buck” is an example of just how risk-averse the industry is. Even modest losses are unacceptable.
In reality however, money markets are not frozen at all. Evidence for this keeps popping in local news reports about money still being available for homes, cars, and other things. In fact, I have heard reports of smaller banks getting into trouble not because of bank runs and bad debt, but because they have excess liquidity.
These banks because of their small size never played the market speculation games of the larger banks. Therefore, they were not exposed to derivatives. Instead they continued to use old techniques of taking deposits and loaning them out to additional clients. The interest from these loans goes to pay the interest for the savings accounts. If a bank has excess liquidity, then it’s not making enough interest from its loans to payback the depositors, and the bank starts losing money.
Their solution, find people who need to underwrite loans and the first person on the list are car dealers and real estate brokers. With the “paper market freeze” car dealers no longer have the ability to hand off new loans like hot potatoes to mortgage brokers, so they need a new source of capital with which to finance car purchases.
The new process is much slower, and the credentials are more stringent, but it still works. Basically, it’s a new “paper” marker that operates on a much smaller scale. These transactions are for thousands of dollars, not for billions that the larger corporations have become dependent on.
The real crises with “freezing credit markets” is not that its “freezing over”, but that larger corporations now find themselves operating at a major disadvantage to the smaller entities. As the giants fall, the mice come out of there holes and start to take over. The real crises are that the major multi-national corporations are losing power – not wealth.
This is partly reflected in the recent market collapses. Corporations are bleeding not just wealth from debt exposure, but market share from a contracting economy. Even as smaller banks that are not regarded as part of the market structure, complain of not being able to keep up with demand. Is the economy truly contracting, or shifting in scale and nature to one outside the control of the major multinationals?
Of the resent media scare campaign, the so called “credit freeze” is by far the biggest, baddest boogieman out there. For most members of congress, just the mere threat of a credit freeze was enough to stampede them to voting for the recent $700bill bailout.
The beast is usually described as thus. Corporations need to barrow money on a daily bases for every thing from making payroll and paying venders to buying offices supplies and paying bills. They usually barrow this money from something called the “paper markets”, also called the “money markets.” I have heard the paper market described in several ways, but one that seems to be the most consistent is like a collective interest bearing savings account. Corporations “deposit” their operating capital into the paper market, much like you or I. And just like any savings account, then can pull this money out at any time for basic operations.
But if they pull more money out then they put, this is a loan and they have to pay it back the next day, plus interest. The interest is then divided among every one else who has still has money in the fund. Well that actually sounds rather stable. This is what traditional banks do; they take deposits and issue them out as loans to barrowers.
The “beast”, if you will, is described that these funds will “break the buck.” That is a corporation will pull less money out of their money market accounts than they put in. Right off the bat we know that this not like any conventional savings account that we are familiar with. Apparently, money market funds are still speculative investments. They are to be ultra-super safe investments with virtually zero return, but it’s still an investment that still has risk associated with it. In fact it’s such a risk-free investment that it has never lost money – until now, or at least threatens too.
And this is the claws of the beast. If the money markets “break the buck”, than all the corporations will pull their money out, and the money market “freezes up,” because there is no longer any money to loan out to corporations for day to day operations. Worse yet, corporations will no longer be able to pay their employees and venders. And the economic earth literally stops turning in the ultimate dooms day scenario, or so we are told. Any way, it is for this reason why the banks need to be bailed out to the tune of $700 billion.
But the media has been tight lipped on explaining how the money markets got into trouble in the first place. At first blush, it seems logical to assume that this has something to do with all those toxic securities that have been blowing up on the banks accounting sheets. They then raid the money markets in an effort to cover the holes. But if they are doing this, they are doing so illegally, and the bailout is more than just a racket, but making congress accessory to the crime. (Most if not all are already war criminals, hay why not add to the list?) But to my knowledge, no one is accused the banks of raiding these funds.
For one thing, the money markets are not “frozen.” What they are – is expensive. The interest charged for a “loan” from the paper markets is based on the availability of equity in the fund and the size of the loan. The more money you draw from the fund vs. its existing equity, the higher the interest. If loans start to test the fund, the interest rate paid out goes up, attracting additional investors into the system. So, why are corporations fleeing the money markets?
Answer – they aren’t “fleeing” but disappearing. The economy has turned down. It’s not just we average presents who pay more for food, gas, and every thing else, but business and corporations as well. As a result, they have to deal with tighter budgets; this translates into pulling money out of investments – and running on leaner money market accounts. And less money in the accounts means more expensive barrowing.
Add to that the constant fear-mongering about the frozen-credit markets, and this is bound to send some participants heading for the hills. The fear-mongering has produced a self fulfilling prophecy which surprise surprise, actually came true.
That is not to say that the money markets were in good working order before Bush opened up his pie-hole. The money markets are dependent on a bull market, build on the false assumption that bear markets not only could no longer happen, but that new market “innovations” rendered the vary notion of bear markets obsolete. In other words, even the slight risk associated with money market funds was waved away and ignored by investors. Just like market securities built on sub-prime loans, these risks rematerialized once a bear market asserted itself.
Corporations say that they are risk takers. But truth in fact is that they are extremely paranoid about risk and only invest in sure things. Money markets are said to be low risk, had the players in this market been willing to accept their losses in the market down turn, there would be no crises. But the term “breaking the buck” is an example of just how risk-averse the industry is. Even modest losses are unacceptable.
In reality however, money markets are not frozen at all. Evidence for this keeps popping in local news reports about money still being available for homes, cars, and other things. In fact, I have heard reports of smaller banks getting into trouble not because of bank runs and bad debt, but because they have excess liquidity.
These banks because of their small size never played the market speculation games of the larger banks. Therefore, they were not exposed to derivatives. Instead they continued to use old techniques of taking deposits and loaning them out to additional clients. The interest from these loans goes to pay the interest for the savings accounts. If a bank has excess liquidity, then it’s not making enough interest from its loans to payback the depositors, and the bank starts losing money.
Their solution, find people who need to underwrite loans and the first person on the list are car dealers and real estate brokers. With the “paper market freeze” car dealers no longer have the ability to hand off new loans like hot potatoes to mortgage brokers, so they need a new source of capital with which to finance car purchases.
The new process is much slower, and the credentials are more stringent, but it still works. Basically, it’s a new “paper” marker that operates on a much smaller scale. These transactions are for thousands of dollars, not for billions that the larger corporations have become dependent on.
The real crises with “freezing credit markets” is not that its “freezing over”, but that larger corporations now find themselves operating at a major disadvantage to the smaller entities. As the giants fall, the mice come out of there holes and start to take over. The real crises are that the major multi-national corporations are losing power – not wealth.
This is partly reflected in the recent market collapses. Corporations are bleeding not just wealth from debt exposure, but market share from a contracting economy. Even as smaller banks that are not regarded as part of the market structure, complain of not being able to keep up with demand. Is the economy truly contracting, or shifting in scale and nature to one outside the control of the major multinationals?