Companies cannot borrow:
Some small companies say they are no longer able to get loans from newly cautious banks as credit tightens across the country, and even those who do qualify are increasingly reluctant to borrow and expand, fearful of overextending themselves in the midst of the financial crisis.
State governments cannot borrow:
Massachusetts State Treasurer Timothy P. Cahill this week approached the U.S. Treasury and the Federal Reserve Bank of Boston about lending Massachusetts money under the same extraordinary terms the government is giving banks and Wall Street firms during this financial crisis, The Boston Globe reported.
The request was prompted by the state’s inability to borrow from the short-term debt markets because the financial turmoil has essentially caused credit markets to stop lending or charge prohibitive rates, The Globe said.
Earlier this week, Mr. Cahill’s office shelved a $750 million debt offering because there were no buyers for state or municipal debt, he said. He did not say how much the state might want to borrow from the Fed.
Massachusetts’ need is not as urgent, Mr. Cahill told The Globe, as the state of California’s, which requested similar federal assistance on Thursday. California officials said the state would run out of money by the end of the month if the short-term debt markets do not ease, and if it could not obtain loans from the Fed.
The state of California needing an emergency loan of $7 billion dollars from the Federal treasury, to just meet its short term obligations, tells you how frozen solid the credit markets have become.
This is how the irresponsibility of Wall Street will ultimately undo us all: Not by scouring our tax dollars but by collapsing profitable companies–companies that actually do things, that have an actual social value–and by collapsing the state governments that provide the meaningful services that make our lives possible.
The bailout package passed last week, if I understand it, was intended to prevent exactly this. By taking away the most toxic of the debt held by banks and directly pumping cash into their coffers, it was hoped that lending by these banks would resume.
Most of us aren’t really directly impacted by the Dow trading below 10,000 points today. If this sort of short term lending doesn’t restart very shortly, even those of us without massive investment portfolios will start to feel a sharp bit of pain from this panic.
By the nature of things like Net 30 payment terms,we’ve had a grace period. As we’re hitting about a month away from the collapse of Lehman Brothers and the start of this panic, things could start getting very ugly for people living paycheck-to-paycheck and businesses that must wait for a while before receiving payment for their work.
An example, by which I’ll try to explain why. Let’s say we’re a company that does laundry for hotels around town, on Net 30 terms. In other words, our customers have thirty days to pay us for the work we’ve done for them.
But, we have to pay our worker’s paychecks every week. So, while waiting the thirty days for our customers to pay us, we might borrow money for a few weeks to fund the paychecks. No big deal. When the customers pay, we pay back the loan.
These are the sort of loans, short term and low risk, are apparently drying up as banks panic and hoard cash for themselves rather than lending it out. Companies, even profitable companies that have reliably met their financial obligations, are now having to resort to usurers (demanding 30% interest rates before lending) in order to finance their basic operations. Companies perceived as being on shakier ground might not be able to borrow at all.
To understand how ugly this all can get, the customers in this example (the hotels) also rely upon short term lending to pay their costs (while waiting the thirty days for vacationers’ credit card companies to pay them.) If they can’t get a short term loan, we won’t get paid. If we don’t get paid, our employees won’t get paid. Add in the fact that state governments can’t borrow either, and thus run the risk of defaulting and failing to pay out state payrolls.
Extrapolate this over the complex web of payments and short-term loans that make our economy function, and you can see how the whole teetering tower can collapse.
and OM, you still havent explained how your “DO SOMETHING, ANYTHING!” hysterical support is warranted for that craptastic bill isn’t going to restore confidence and liquidity in credit markets.
So Jonathan, my question is this: how’s that $850 billion doing at dealing with this credit crisis?
“you see how the whole teetering tower can collapse.”
a) this was a very long-lived thread, and has kept me from much work today!
b) the disputatious comments seem to boil down to whether it’s true that the tower “can collapse,” i.e., unless we do/did something and fast; or if it’s instead true that what we’re seeing is the collapse itself of a tower that will not uncollapse with the hurling of tax dollars in its general direction.
We have a poorly scoped argument using ill-defined terms so far, a dispute over milk that may or may not be milk, may or may not have in fact spilled, and the extent to which crying over it is helpful and/or sincere.
FWIW, maybe Roubini’s latest glowerings present a sobering view of how radical the terms of an effective discussion may need to be.
Greg–
It’s a rhetorical question you’re asking. I’m answering it anyways.
Too early to tell.
The bill is much better than the original proposal from Paulson. (Thanks Christopher Dodd!)
It’s probably too little too late, given the collapsed commercial paper market traded (before this crisis) hundreds of billions of dollars a day–on the order of the entire bailout.
I’m already thinking about what we can do if there is nothing the government can do to prevent the total meltdown of the entire credit private credit system.
I’ve already written about vastly beefing up the SBA. I also think we should at least prepare for a total economic collapse, by extending medicare benefits to everyone, starting a government-backed open venture capital firm and perhaps even resurrecting a WPA-like work program. People are still buying federal treasury bonds. Pouring that money into the market might not help. We could at least consider directly employing the newly unemployed.
But I’m a dirty fucking socialist. You already knew that.
Thanks for the response. It wasn’t actually a rhetorical question; I’ve been reading a lot of articles about all this, and I still don’t feel like I have a clue what’s going on.
jonathan saying that the bill is better than the first in spite of 100 bil of pork is like saying palin did very well in the debates in spite of winking. in both cases things still suck.
@ Jonathan Golob,
I love it when you talk dirty.
and OM is like someone supporting a guy running into a burning building to rescue a pitbull; The building is still on fire, the pitbull started the fire, no one believes 911 works and she’s pointing out how the arsonist pitbull coddling japanese loved the heroic actions of running into the building.
Any action isn’t good action OM. You don’t get that.
Luck for us, this guy has all the answers:
OK, how much sand can we buy with 700 billion dollars?
Golob –
And how do you plan to fund this huge new expansion of Medicare/SBA/WPA/etc, especially when our foreign debtors stop cutting us so much slack?
raise taxes, raise em to the hilt. Which isn’t a bad idea.
@13 for the insightful win.
But, most of the problem is we’re bailing out the wrong group – the undertaxed unregulated hedge funds for the ultra-rich – instead of buying the actual underlying US-only residential-only mortgages that are problematic – at cost not triple price – and refinancing them on proof of income as 30 or 40 year fixed mortgages.
But that would be cheaper and actually fix the problem without enriching further the ultra-rich, so we can’t do that in Socialist Republican America.
Jonathan,
Please write more dirty fucking posts about the economy for those of us who don’t understand what’s going on.
(ps – if you know of any good primers, I for one would appreciate it.)
http://www.wikipedia.com
wikipedia
For the record (for those who think that Wall Street has no effect on “us”:
http://www.washingtonpost.com/wp-dyn/content/article/2008/10/07/AR2008100703358.html
Retirement Savings Lose $2 Trillion in 15 Months
The stock market’s prolonged tumble has wiped out about $2 trillion in Americans’ retirement savings in the past 15 months, a blow that could force workers to stay on the job longer than planned, rein in spending and possibly further stall an economy reliant on consumer dollars, Congress’s top budget analyst said yesterday.