The Commercial Paper Funding Facility ...

[gonegolfin]

Well, we have another acronym to add to our alphabet soup of Fed lending and purchasing programs. We now have the "Commercial Paper Funding Facility" (CPFF). I am still waiting for the BFRFF (Benton Family Retirement Funding Facility), but nothing has been announced yet by the Fed at press time. With the CPFF, the Fed is attempting to unfreeze the commercial paper market (both unsecured and asset backed) by being the "buyer of last resort" instead of just the "lender of last resort". You may remember the piece I wrote last week about how the bailout program (oh, excuse me ... the Treasury Asset Relief Program) might put pressure on the commercial paper market ("Unintended consequences of the bailout?") ... well, the news today is definitely an attempt to alleviate gridlock in the commercial paper market. But this time, the Fed is not simply lending to banks and primary dealers. It is lending to/purchasing from all of corporate America.

In recent weeks, just the shortest term issues of commercial paper have found buyers (typically one day). The Fed will now purchase 3-month commercial paper via an SPV (Special Purpose Vehicle) using funds loaned by the Fed at the federal funds rate (which is about to be chopped). It remains to be seen whether or not the Fed will team up with the Treasury again for funding (via the recently announced Treasury Supplemental Financing Program). They may just elect to monetize the commercial paper with the commercial paper serving as collateral. Now, while the Fed is purchasing this paper and expanding its balance sheet, it is really a short term corporate loan. Thus, the money created will be destroyed once it matures (except for the interest) - note that the monetary base will continue to be expanded until the banks begin lending again in the commercial paper market. Most important here is that the Fed is taking on more credit risk. It is also a conflict of interest in that its primary stated mission is to promote stable prices and low unemployment (I know, the impossible dual mandate). But with the Fed assuming 1) risky assets from banks and primary dealers and now 2) buying short term corporate debt ... they are now in the business of protecting their portfolio ... which could conflict with their primary mission (their conflicting dual mandate).

FRB: Press Release--Board announces creation of the Commercial Paper Funding Facility (CPFF) to help provide liquidity to term funding markets--October 7, 2008

Brian

 

[editec]

Brain, I don't think most people here realize how dramtic it is that the Treasury is now in the business of providing short term business loans to corporations.

Few of them seem to understand the amount of money that corporations borrow on a regular basis just to keep the wheels of commerce turning.

You can intuit their ignorance given that many of them (now employed by these corporations) feel that the credit crises cannot possibly effect them because they are personally not in debt and (right now) do not feel like they need a viable credit market.

That's why so many of them are smugly calling for the government to allow all the banks to fail. They do not see the connection between those banks failing and ALL banks failing and with those banks, all corporations failing.

They obviously do not understand the magnitude of borrowing that their favorite corporations do on a daily basis.

They obviously do not understand that their jobs are on the line if those corporations cannot find short term loans.

I think we are seeing the credit house of cards folding becaue the power of compound interest has broken the middle class, personally. It took fourty years but it is finally happening.

I believe our real rate of unemployment is more like 12% than 6%. Throw in the enormous UNDEREMPOYMENT that is effecting many other workers and the whole system is wildly out of kilter.

I'm down here in the trenches with the working class, and I can tell you under not uncertain terms that it is worse, much worse, than the government is leading people like you to believe.

I suspect the upper middle class (most of whom have actually been benfitting from the economy in the last couple decdes) truly doesn't understand how slender that thread is that has been keeping them from falling into the morass of a real depression like many of us in the lower middle class have been in for decades.

That 20-25 % of the population which has enjoyed ral gains in incomes (relative to the rest of the nation) are about to understand my constant refrain:

When your neighbors are getting poorer, so are you.​