Consider it the economic equivalent of Drāno. As the Associated Press reported today:
WASHINGTON – The Federal Reserve announced Tuesday a radical plan to buy massive amounts of short-term debt in a dramatic effort to break through a credit clog that is imperiling the economy.
Invoking Depression-era emergency powers, the Fed will buy commercial paper, a short-term financing mechanism that many companies rely on to finance their day-to-day operations, such as purchasing supplies or making payrolls.
In more normal times, about $100 billion of these short-term IOUs were outstanding at any given time, sold by companies to buyers that included money market mutual funds, pension funds and other investors. But this market has virtually dried up as investors have become too jittery to buy paper for longer than overnight or a couple days.
That has made it increasingly difficult and expensive for companies to raise money to fund their operations. Commercial paper is a way of borrowing money for short periods, typically ranging from overnight to less than a week.
So far today, this step seems to be reassuring investors – somewhat. Markets are down, but only mildly, as opposed to the precipitous drop that on Monday sent the Dow below the 10,000 point mark for the first time in four years. Evidently the clog is loosening, but it’s not fully broken up yet. Banks, for one, are still suffering stock declines. Nonetheless, the Fed’s move should help businesses that have been unable to rely on short-term debt to continue their operations.
