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Message: Email to a friend
I sent this email to a friend this morning after thinking about what the FED had done and trying to figure the why of it.
There may be more to the story of "why" and I may have missed something which invalidates my thinking but here it is for what it is worth.
The FED has now [as of 10/7/08] taken (in addition to its coordinated rate cut with many other, but not all central banks done this morning) to accepting commercial paper. This means they are doing short term loans to companies because the commercial banks won't/can't part with their assets (money).
In brief, the way our system normally works (if you can call this practice workable) is that a trucker/whatever borrows money from a bank to fill his gas tank, then contracts to deliver a load, does so and receives payment, much of which goes back to the bank (ad infinitum).
A few (very few companies, not just truckers, which were used for a simple example) have the cash to work the proper way leaving the banks out of the equation. I.e. buy the gas out of pocket, make the run, collect your costs and profit on delivery.
THE ENTIRE ECONOMY MAY SOON SHUTDOWN if these companies cannot find the funds with which to keep going. Note that the problem exists on both ends too. The trucker who had the sense to not be in debt can only sell to someone else who is not in debt or he can't get paid.
What a mess!
I certainly hope the situation is not as dire as I propose; but that's how I see it.
P.
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