Those who say this is not a crisis that needs intervention by many governments apparently underestimate what happens when leverage meets panic in our intensively credit-driven global business environment. Everything is grinding to a halt, and rather quickly. Bloomberg:

The London interbank offered rate that banks charge each other for loans rose for a fourth day, driving a gauge of cash scarcity among banks to a record. The biggest drop in financial short-term debt outstanding since at least 2000 caused the U.S. commercial paper market to tumble 5.6 percent to a three-year low, according to the Federal Reserve.

The crisis deepened after the worst month for corporate credit on record. Leveraged loan prices plunged to all-time lows, short-term debt markets seized up and even the safest company bonds suffered the worst losses in at least two decades as investors flocked to Treasuries. Credit markets have frozen and money-market rates keep rising even after central banks pumped an unprecedented $1 trillion into the financial system. “The credit window is closed,” Jim Press, president of Chrysler LLC, the third-largest U.S. automaker, said…”It’s going to get much, much worse,” said Gregory Peters, head of credit strategy at Morgan Stanley in New York. “The credit markets are effectively shut, the CP market, which there’s not enough focus on, is under complete duress. That can’t be sustained, as that’s the lifeblood of corporations funding themselves.”…

The difference between what banks and the Treasury pay to borrow money for three months, the so-called TED spread, widened 26 basis points to 3.6 percentage points, the highest since Bloomberg began compiling the data in 1984. Rates on three-month Treasury bills fell 20 basis points to 0.6 percent. The bills touched 0.02 percent on Sept. 17, the lowest since the 1940s…

The Libor-OIS spread, the difference between the three-month dollar rate and the overnight indexed swap rate, widened to a record 260 basis points today. It was 197 basis points a week ago and 79 basis points a month ago…Libor for euros advanced 3 basis points to a record 5.32 percent. Libor, set by 16 banks in a daily survey…is used to set rates on $360 trillion of financial products…The market for commercial paper plummeted $94.9 billion to $1.6 trillion…

More from the WSJ:

The most worrying aspect of the crisis is a growing reluctance among financial institutions to offer basic loans that are the lifeblood of the economic system. The Federal Reserve said Thursday the situation had worsened over the past week. Its data showed lenders reduced short-term loans to companies by a record $94.9 billion, bringing the total decline to $208 billion over the past four weeks.

These loans, known as “commercial paper,” run anywhere from a few days to three months, and are routinely used by businesses of all stripes to fund day-to-day operations — paying the bills, meeting salaries. The market for these loans, which totaled $2.2 trillion last summer, has shrunk to $1.6 trillion. “It’s unprecedented to see the markets shut to so many firms at one time,” says Peter Andersen, a portfolio manager at Congress Asset Management Co., an investment company in Boston.

Indeed, this week, General Electric Co., long hailed as one of the steadiest companies in America, was forced to raise billions of dollars of capital on onerous terms because investors in GE’s short-term corporate debt grew worried about its ability to pay its debts.

The Paulson bailout plan is not sufficient in itself to stem the tide that has now engulfed the financial markets. Nor, in our opinion, are the proposals by George Soros and others to add additional equity capital to further bolster the plan. We are well past the point where it is an excuse for inaction that some politicians may be using the so-called bailout as a CYA of their previous improvident acts; these miscreants need to be held accountable, but that is not an excuse for failing to fix the current problems. We expect the Fed and the ECB and other central banks to cut borrowing rates soon and significantly, in addition to their continuing to add massive amounts to liquidity to the system. And hopefully, at some point, pushing on a string will have some salutary effect. If not, watch out. All bets will then be off.

This entry was posted on Friday, October 3rd, 2008 at 6:06 am and is filed under Democrats, EU, General, Republicans, business. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.