As the hysteria has grown in the discussion of financial markets and related government policies, I have been puzzled by the discrepancy between the best available data and the descriptions quoted in the press — statements by financial gurus, traders, and professors, as well as by government officials. To hear these spokesmen tell the story, you’d think that the world will soon go to hell in a hand basket, if it hasn’t gone there already. Yet every time I look for data to check these claims, I find nothing solid to back them up.
The latest case in point concerns the markets for commercial paper. The Fed has just announced that it will launch an unprecedented program to support this credit market. As MarketWatch describes this initiative, the Fed "will buy unsecured commercial paper in an effort to restart a market that’s ground to a virtual halt in recent weeks." This report goes on to explain that the Fed’s purpose is "to get lending flowing again." It quotes John Ryding of RDQ Economics, who foresees dire consequences "if the Fed doesn’t unfreeze the credit markets." Got the picture? Restart a virtually halted market; get lending flowing again; unfreeze credit markets — all of which suggest that at present nobody is borrowing and lending in these markets.
Such comments are extremely common in the press. Bloomberg’s Commercial Paper Primer quotes New York University economist Mark Gertler’s statement that "large corporations are having difficulty obtaining funds via the commercial paper market." A commentator at "The Bonddad Blog" says: "people are unwilling to buy this paper. . . . [N]o one is buying any commercial paper" (although, inconsistently, this same blogger notes that "lenders . . . are asking for a higher interest rate to pay them for a short-term loan," which implies that someone is lending).
The Federal Reserve System publishes comprehensive data on commercial paper issuance, commercial paper outstanding, and interest rates on commercial paper. I presume that these data give us a clearer picture of what’s going on in the markets than a covey of hyperventilating Wall Street commentators.
Consider first the interest rates for commercial paper. For the past several weeks, 30-day nonfinancial paper has been going for about 2 percent; 60-day and 90-day loans in this market have required a slightly greater rate of interest. Financial commercial paper has been going for roughly 3 percent, give or take a few tenths of a point, with little difference among the 30-day, 60-day, and 90-day rates.
Given that the rate of inflation at present is greater than 3 percent, and presumably will remain greater than 3 percent for the next three months, these nominal interest rates on commercial paper imply that lenders are actually giving away money to corporations that sell commercial paper — the nominal rates of interest are less than the expected rate of inflation. Is this situation what one expects to see during a "credit crunch"? Hardly.
Many commentators claim, however, that virtually no transactions are occurring in this market. These claims are completely false. For the week that ended October 1, which is the most recent week currently reported, total commercial paper outstanding amounted to $1,607 billion. Yes, this amount was down from the $1,702 billion reported for the previous week, but is a 5.6 percent drop a good reason to panic? If we go back to March 2008, when nobody was talking excitedly about the commercial market’s "freezing up," we find that the total amount outstanding, on average, was $1,822 billion, or only 13 percent more than last week. In March, the market was working fine; now it’s "locked up." This sort of hyperbole, with which we are being bombarded hourly around the clock, is totally without a basis in the facts.
For the year 2006, when the financial markets were, for the most part, still ripping along very nicely, the total amount of commercial paper outstanding, on average, was $1,983 billion; for 2007, it was $1,781 billion. For the past seven months, on average of the monthly data, it was $1,743 billion. Does this 2.1 percent decline from last year’s average give us a good reason to jump off a tall building?