Fed aims to become counterparty in commercial paper market…. Necessary to normalize short term business lending during crisis, But introduces undesirable government control and intervention during non-crisis periods. This is *very* interesting. Bernanke power grab?
The TED spread is probably the most telling *leading* publicly available metric to measure how significant the impact of the Wall Street crisis will be on Main Street. The TED spread measures the difference between risk-free short term US Treasuries Bills and the rate that banks lend to one another (LIBOR).
LIBOR is also used as a basis for the rate businesses can raise short term capital (issue commercial paper). As an intern in the Treasury of CHW, I’d sit in on the semi-weekly calls that the company did to get or issue short term financing from it’s market makers. Historically it has been the cheapest place a large corporation can raise short term capital.
Anyway the current crisis has increased LIBOR 350+ percent from the historical average effectively increasing the cost of capital to all borrowers, making it more efficient to use business lines of credits and other more expensive lending facilities increasing the cost of capital across the board for all corporations that rely on commercial paper to smooth cash flow. Increased borrowing costs introduce increased margin pressure as companies cut back both on both employee and corporate spending to deal with the new cost of doing business.
Instead of buying today they buy tomorrow which shifts buying in the future reducing growth today. This shift is transmitted to smaller companies (even ones that don’t directly participate in the credit markets) through delayed or canceled purchases of their services or products which introduces margin pressure to the bottom lines of those companies. The cycle repeats until the entire economy has adjusted to the new cost of of doing business.
Consumer spending slows because there is less money for employees to spend (by way of decreased raises, decreased hours or layoffs). The growth of online consumer spending determined by the growth of all consumer spending. So yes, the Fed stepping in as a counterparty in the commercial paper market has an impact on the growth of consumer spending …
The 12 percent drop in the TED spread today after the Fed plan was revealed serves as evidence that the credit market agrees with the move. This is the largest downward move of LIBOR since the Lehman collapse. What remains to be seen/determined is if the Fed will become a permanent market maker in this market