Commercial Paper

There's a lot of feeling that the current situation is not of much interest to anyone but big Wall Street players, that, generally, non-financial businesses will be unaffected, or only modestly affected, either by the bailout package (whatever it turns out to be) or by the failure of Congress to pass a bailout.

But ordinary businesses are already paying the price for the chaos in financial markets. All we have to do is look at what's happening in the markets for commercial paper.

On September 2 (according the the Federal Reserve Bank of St. Louis), the AA non-financial commercial paper (typically used to finance inventory purchases or to provide working capital for other purposes) rate was 2.35%, and was basically unchanged until September 12 (2.39%). On September 24, it was 3.35% (And on September 29, 3.14%; it's been fairly volatile in the last week or so.)

The weekly average amount (of daily issues) of commercial paper issued has declined from $8.144 billion during the week ending September 5, to $5.964 billion for the week ending September 26--a decline of about 26%. During the week ending on September 26, daily issue of commercial paper fell from $6.393 billion on Monday to $4.886 billion on Friday--a decline of almost 24%. (Also Federal Reserve data.)

So already non-financial firms have experienced a significant increase in interest rates and a significant cutback in the amount of short-term financing for commercial activities. This makes it harder--and significantly more costly--for businesses of all sorts to finance and manage their activities.

The financial crisis is not "Main Street" vs. "Wall Street." It's about providing consistent and sufficient credit for production, distribution, and sale of the goods and services our economy produces. A continued failure to deal with this crisis will not be confined--has not been confined--to the financial sector. It has already spread into the financing of day-to-day business activity. And unless we find a reasonable solution, things are likely to get worse.