Since we'll probably all be joining the ranks of the unemployed in the coming months, it's nice to know that that there are ironic pleasures to be had at the employment office. From a friend of a friend (yes, it's an actual person; the educational-video connoisseurs among you may even be able to figure out who it is):

So I had to go to an "employment reeducation orientation session" (how sinister sounding is that?) at the NJ Dept of Labor today in order to be eligible for benefits. The centerpiece of the two hour session was a video entitled "Resume Writing: A How To Guide" produced by--you guessed it!--yours truly. "This," I say to myself, "is irony;" and I am pleased because I'm a connoisseur of irony. Plus, it's not a bad show, if memory serves.

I glow with a secret delight as I watch in the semi darkness, a superman in a room full of hapless Clark Kents. I soon notice to my annoyance, though, that the guy next to me is fast asleep, and we're not even five minutes in. I do a discreet survey of the room, and of the 20 odd folks there, at least three are in full REM, four or five more are fighting hard but their lids are drooping, and the rest have a glassy, dull-eyed look, as if they cannot fathom how they ended up in this miserable place. One dear soul--from the looks of her someone's unneeded admin--is taking notes. Silently, I bless her.

When the program's over, I opt to keep my secret identity a secret. I am given information about how to become certified as a forklift driver. And I am allowed to go home.

Over the past couple of weeks there's been chatter about companies possibly not being able to pay workers because of the credit crunch. The idea is that without ready access to the commercial paper market—which big companies use to issue short-term IOUs—there won't be enough money to finance things like inventory and payroll.

The commercial paper market has seriously been slammed: at $1.6 trillion, it's 27% smaller than when the credit crunch began in the summer of 2007. A lot of that drop came right at the outset and was due to asset-backed (i.e., real estate-related) paper. In recent weeks, even non-financial companies that don't have anything to do with houses or mortgages haven't been able to float issues—which is why the Federal Reserve is going to start buying commercial paper directly, in an attempt to jolt the market back to life.

But just in case that doesn't fix everything overnight, as these solutions often don't, I'd like to say right now that I don't think we're likely to see a rash of companies turning up empty-handed on payday. Companies—and we're talking large corporations here, not small businesses—get money for expenditures, like paychecks, from a number of sources. From commercial paper, sure, but also from longer-term bond issues, bank lines of credit, liquid assets sitting on the balance sheet, and, importantly, from selling whatever it is they sell. If a company can't float commercial paper, and on top of that is having a tough time getting an extra line of credit from a bank (they're still being persnickety about lending, too), there is still that good old-fashioned fallback of financing operations with profit.

Part of the reason I think that this is, for otherwise healthy companies, still feasible on a mass scale, is because companies haven't always so heavily depended on commercial paper. For non-financial firms, even just four years ago, the market was a fraction of what it is today. Check out the amount of commercial paper outstanding (courtesy of the Fed):

Does not having access to commercial paper cause some companies to make hard decisions about expenditures? I have no doubt. Does it push up the cost of borrowing, and rejigger notions about how much they should be hiring or investing in new equipment? Absolutely. Does it push them to the point of not being able to scrape together enough cash on a particular Friday to pay employees? I think we've all learned to say nothing is impossible. But I'd be surprised.

Barbara!

I should really turn off CNBC, as it's shaking my brain into Jello, but Zachary Karabell just said something I liked:

Unless you believe the market's going to hit zero in 25 days, we're not going to have days like this every day.

But what if you believe the market's going to hit -10,000 in 50 days?

Update: The Dow ended up dropping 508 points. It would take less than 19 days to get to zero at that rate! What I'm waiting for is when it hits 3,600, and James Glassman and Kevin Hassett reissue their infamous book with a zero lopped off the end.

From Robert Lucas's 2003 presidential address to the American Economics Association:

Macroeconomics was born as a distinct field in the 1940s, as a part of the intellectual response to the Great Depression. The term then referred to the body of knowledge and expertise that we hoped would prevent the recurrence of that economic disaster. My thesis in this lecture is that macroeconomics in this original sense has succeeded: Its central problem of depression-prevention has been solved, for all practical purposes, and has in fact been solved for many decades.

I've addressed this before, but it keeps coming up--in e-mails from readers, among many other places--so I'm gonna outsource to Dan Gross:

Fannie and Freddie, which didn't make subprime loans but did buy subprime loans made by others, were part of the problem. Poor Congressional oversight was part of the problem. Banks that sought to meet CRA requirements by indiscriminately doling out loans to minorities may have been part of the problem. But none of these issues is the cause of the problem. Not by a long shot. From the beginning, subprime has been a symptom, not a cause. And the notion that the Community Reinvestment Act is somehow responsible for poor lending decisions is absurd.

He goes on:

The Community Reinvestment Act applies to depository banks. But many of the institutions that spurred the massive growth of the subprime market weren't regulated banks. They were outfits such as Argent and American Home Mortgage, which were generally not regulated by the Federal Reserve or other entities that monitored compliance with CRA. These institutions worked hand in glove with Bear Stearns and Lehman Brothers, entities to which the CRA likewise didn't apply. There's much more. As Barry Ritholtz notes in this fine rant, the CRA didn't force mortgage companies to offer loans for no money down, or to throw underwriting standards out the window, or to encourage mortgage brokers to aggressively seek out new markets. Nor did the CRA force the credit-rating agencies to slap high-grade ratings on packages of subprime debt.

Just to reiterate: I know there were big problems with Fannie and Freddie. And I'm sure there were some problems with CRA as well. As one reader e-mailed this morning:

As a mortgage originator for 20 years at Bank of America I know the pressure we faced due to the Community Reinvestment Act. Banks were penalized for not complying.

But banks weren't at the leading edge of the subprime boom. In the hierarchy of causes of our current debacle, I just don't think Fannie-Freddie and the CRA make it into the top 5. The CRA probably doesn't even make it into the top 10. And yes, I know, I should probably get to work compiling that hierarchy of causes.

Fed chairman Ben Bernanke gave his first speech in a month today (although I guess he did do some testifying a couple weeks ago). In typically laid-back Bernankian fashion he described all the crazy stuff that's been happening, described the response by the Fed, Treasury and FDIC, and said that he believed these "bold actions ... together with the natural recuperative powers of the financial markets, will lay the groundwork for financial and economic recovery."

The stock market spent most of the speech dropping, not that that necessarily means anything. And one passage from the speech, when he was talking about the $700 billion Troubled Asset Relief Plan, struck me as particularly interesting:

Importantly, the legislation that created the TARP does provide sufficient flexibility to allow for different approaches to solving the problem--subject, of course, to the close oversight that will ensure that the program's funds are used in ways that are in the interest of taxpayers.

I think it's accurate to say that a majority, or at least a plurality, of academic economists think Treasury would do better to use its $700 billion not to buy mortgage securities on the open market but to recapitalize banks and take big equity stakes in them--a partial and presumably temporary nationalization of much of the banking system.

The language of the legislation creating TARP does seem to allow for this. Treasury can buy assets directly from a particular financial institution, and is required to demand a significant stake in return. Is Bernanke already hinting at a pivot in this direction?

When Hank Paulson and Ben Bernanke testified before Congress a few weeks ago, they got asked about regulating credit default swaps—insurance contracts tied to bonds that have taken on a potentially dangerous life all their own. The response was basically: It's really important to sort these things out, but also really complicated, and we're trying to figure out how to do it. SEC chair Christopher Cox, interestingly enough, was the most enthusiastic about getting statutory authority to regulate ASAP.

Well, it looks like the Chicago Merc and hedge fund group Citadel are beating them to the punch. As the AP reports:

Exchange operator CME Group Inc. said Tuesday it is teaming up with Citadel Investment Group LLC to create an electronic trading platform for credit defaults swaps.

The nonbinding agreement calls for a joint venture to launch within 30 days that would provide a fully integrated trading and clearing platform for trading the complex derivative contracts that have been one of the central culprits in the ongoing credit crisis.

If the plan goes through and gets enough participants to work, it will be great news. The opaqueness of credit-default swaps has caused a lot of problems of late—like that whole AIG thing. But what everyone has really been worried about is the proverbial other shoe dropping. Places CDS exposure is lurking that we don't know about.

As a sidebar, if this new market works, it will also be a nice pick-me-up for Citadel. As the New York Times reports the hedge fund business ain't what it used to be, even for a giant like Ken Griffin.

Barbara!

Governments around the world have been acting to avert panics by retail bank customers, and they've mostly succeeded. That's a good thing, but it's also sort of beside the point. "Main Street depositors are keeping confidence," FDIC chairman Sheila Bair said when I talked to her last week. "It's other banks that are the problem."

The issue is that banks in the U.S. and other countries with long-running current account deficits pretty much by definition make more loans than they have deposits. John Hempton has been hammering on this for a while, so I'll let him explain:

(more...)

The next bold experiment (or desperate gambit, if you prefer) from the Fed appears to be a plan to start buying commercial paper directly from the companies that issue it. The reason is that the commercial paper market, a key source of short-term funding for big companies, is shrinking rapidly.

The Fed mentioned as sort of an aside to a press release issued first thing Monday morning that it was discussing such a step with Treasury.

Things have moved along a bit since then. Reports the Washington Post:

Last night, the Fed was drawing up plans to set up a special fund that would buy short-term commercial paper. The purchases would benefit banks as well as non-financial companies.

The fund would be financed by a loan from the Fed, and any losses would probably be covered by the Treasury using its new $700 billion bailout package. Fed and Treasury lawyers were hammering out details last night.

The commercial paper market is generally pretty low risk, so the likelihood of taxpayers losing a lot seems slim. Then again, the likelihood of a lot of the things that have happened over the past couple of weeks would have seemed awfully slim a month ago.

The bigger issue may be the Fed and Treasury, which have already become the most important actors in the banking industry, are about to expand beyond it to dole out credit directly to corporate America. As Floyd Norris, who was the first to get the significance of the proposal Monday morning, wrote:

[W]e may soon have the government deciding which companies deserve short-term loans, and at what interest rates. Does this remind anyone else of central planning systems?

Update: The plan is out, and it's called the Commercial Paper Funding Facility (CPFF), which will use a special purpose vehicle (SPV) to "purchase three-month unsecured and asset-backed commercial paper directly from eligible issuers." The press release continues:

The Federal Reserve will provide financing to the SPV under the CPFF and will be secured by all of the assets of the SPV and, in the case of commercial paper that is not asset-backed commercial paper, by the retention of up-front fees paid by the issuers or by other forms of security acceptable to the Federal Reserve in consultation with market participants. The Treasury believes this facility is necessary to prevent substantial disruptions to the financial markets and the economy and will make a special deposit at the Federal Reserve Bank of New York in support of this facility.

Got that? Also, I have a related post here.

Update 2: Turns out Nouriel Roubini recommended this move last week.