Problem Looms In Debt Crisis

Over the last year, the commercial paper market has been drying up. With the recent crisis of Lehmann Brothers and AIG, the short term debt market has gotten even more tight. That’s a problem for the big Wall Street banks, right?

Wrong. The short term debt market needs to maintain its liquidity because that’s the market that businesses head to when they need short term funding. Properly running debt markets keep the financial system humming along.

For example, many large companies get credit on their accounts receivables by selling commercial paper. They can get cash now instead of waiting for payment. They use this cash from the short term debt to fund day to day business operations. From suppliers to utility bills to even payroll, expenses are paid for with these short term debt instruments. If you can connect the dots, frozen commercial paper market = no payday.

How close are we to seeing large companies miss payroll? Right now, it’s anyone’s guess. Something needs to be done about the crisis and it needs to be done right now. I think we could be on the edge of an abyss and if action is not taken, businesses are going to fold, people are going to lose their jobs and the economy is going to tank for a long time. The solutions is simple, get the debt markets functioning and then worry about cleaning things up.

Think of the US economy like a big ship whose the engine has exploded and a big storm is bearing down. We don’t need people passing along blame for the engine problems. We don’t need people talking about how to clean it up or even insisting on cleaning it up before it’s fixed. We need someone who can immediately get the engine going again, even if that means it needs to be Yankee rigged. Once it’s going again, clean things up and look at getting repairs done to keep a repeat from happening.

Tags: commercial paper, debt crisis, short term debt