Printer-Friendly
Email this Story
Post a Comment (0)
Thawing the credit freeze
The Federal Reserve announced Oct. 7 that it will buy commercial paper – short-term debts that businesses use to fund their daily operations – in order to free up the loan market.
As the money markets continue to plummet, the Reserve stepped in saying that its plan will “enhance the ability of financial intermediaries to accommodate the credit needs of businesses and households,” according to a statement released Tuesday morning.
“Unfortunately this was necessary,” said Brad Parker, owner of MyFlorist in McLean. “Money and credit to businesses is what water is to a farmer, and without it we would dry up.”
Parker, who had the knowledge and foresight to seek credit when it was not dire for his business, said he has credit lines in place that will allow him to make it through these tough times.
“If I didn't I would be in the position of having to let employees go, but I don't have to because I have credit lines in place,” he said.
“As painful as this process is, [the federal government] is doing what they have to do. Until they find the bottom line of this abyss, they need to make credit available.”
Fairfax County Chamber of Commerce President William Lecos concurred, saying, “This is another step in a long journey that is beginning to allow the underlying strength [of small businesses] to move forward. This is a step.”
Stephen Fuller, director of George Mason University's Center for Regional Analysis, also said “this is a very important step” and it is “part of the bigger efforts that are to help unjam the financial freeze.”
Fuller added that if the lack of credit availability continued, “there would be a major restraint on local businesses of all sizes. This was a necessary step. The Fed wouldn't have done it if the banks could have. This is probably the [fastest way] of fixing this problem.”
The Fed's plan is something the government has not done in the past, but drastic times call for drastic measures.
“The commercial paper market has been under considerable strain in recent weeks as money market mutual funds and other investors, themselves often facing liquidity pressures, have become increasingly reluctant to purchase commercial paper,” the Reserve stated in a press release. “As a result, the volume of outstanding commercial paper has shrunk, interest rates on longer-term commercial paper have increased significantly, and an increasingly high percentage of outstanding paper must now be refinanced each day.”
This new plan, which is not part of the $700 billion bailout plan, “should encourage investors to once again engage in term lending in the commercial paper market,” the Fed stated.
You must be logged in to post a comment.