Commentaries
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Commercial paper market still smaller than 2003
Earlier today the Fed’s commercial paper data caught my eye – the nearly $70 billion surge in short-term borrowing in the latest week was hard to miss. At $1.3 trillion, the CP market is still a shadow of its former self. It peaked at $2.2 trillion in the summer of 2007 right before the bottom fell out of credit markets.
But that’s a good thing. Much of the growth during the boom came in the asset-backed part of the market, which subprime mania infected during the boom. When money market managers woke up to the fact that they may have exposure to subprime, they bailed, helping to spark a run on short-term markets that only buckets of liquidity from the central banks stopped.
It will be worrying if the surge in CP continues indefinitely, though, since we all know how dangerous it can be when companies become too addicted to cheap short-term borrowing. But for the moment, it doesn’t seem excessive. Even with the $234 billion expansion since the end of July, the market is still smaller than where it stood in 2003 at $1.35 trillion.
Just in case you were wondering, no exit yet
Earlier today the Fed announced that it would extend a number of programs slated to expire this year until February 1, 2010, making it clear for any of the doubters out there that the Fed is not ready to pull the plug on its patchwork of support for financial markets. It probably would have made a bigger exclamation point if the Fed Board had made the announcement yesterday when the FOMC stood pat on its policy, but no matter.
I had argued earlier this week, that now would be a good time for the Fed to go for the low hanging fruit when it came to an exit strategy and commit to winding down, among its lending facilities, the Commercial Paper Funding Facility when it was due to expire this year. After all it would show that it was committed to the temporary nature of these programs and give those worrying about too much stimulus something to chew on.
First exit for the Fed
Call it a battle for beginnings and endings, and the Federal Reserve is smack in the middle.
As Fed policymakers convene for a two-day meeting starting on Tuesday, the lines are growing more defined between those who want the Fed to do more to stimulate a still fragile economy, and those who are calling for a defined exit strategy to prevent the global economy from going into an inflation-inducing overdrive.
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The Wall
