Fed To Now Consider Buying Companies’ Unsecured Debt.

So, let me get this straight. They could not get this $700 billion bailout passed quick enough last week, only to have the Dow do a massive see-saw all day on Monday. Seems the bailout sure is working, right? I mean, they said they needed it done weeks ago or we were all going to die – so to watch the markets react negatively to the passing was interesting. Now, the NY Times is reporting that the Fed is planning on buying companies’ unsecured debt, putting even more of our tax dollars on the line.

The Fed plan is intended to renew the flow of credit on which the economy depends. Under its plan, the central bank would buy unsecured commercial paper, essentially short-term i.o.u.’s issued by banks, businesses and municipalities. The market for that kind of debt has all but shut down in the last week, with many major corporations unable to borrow for longer than a day at a time, as banks become more fearful of giving out cash. The volume of such debt totaled about $1.6 trillion as of Oct. 1, down 11 percent from three weeks earlier.

Oh good, we are going to play the I.O.U. game with worthless pieces of paper and even more of our tax dollars. This outta shore things up, no?

“There is a growing recognition that not only has the credit crunch refused to be contained, it continues to spread,” said Ed Yardeni, an investment strategist. “It’s gone truly global.”

Ya think? I am not sure I need to be an investment strategist to see that from my living room couch, Ed. I just think that we stop all this nonsense, let the chips fall, and we deal with it. We already gave them our retirement and our kids retirement money to play with; I am not so sure I want to give them my grandchildren’s money as well.

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Comments (8)

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  1. Miranda says:

    Well said! This is moving into a realm so far beyond ridiculous. SO, this time “trickle down” will work? Just like bailing out the top was supposed to work? Now we’re going to pay off their unsecured debt? I’d like my credit card debt paid off, please. Oh wait. I don’t have $100 billion in assets under management. I’m not rich enough to need it…

  2. DadTopics says:

    Right on! We have to let the markets purge themselves. These bailouts are a waste of money. Sure, some of it will come back, but it was better left alone.

  3. WealthBoy says:

    The Federal Reserve is actually independent within government and generates its own revenue with Open Market Operations. The money the Fed will use to purchase the commercial paper won’t come from taxes. The purchase and sale of securities is part of what they do to implement monetary policy. They primarily do this with Treasury securities but commercial paper isn’t out of the question either as they have demonstrated today. I think that it is actually a fairly reasonable action to help provide liquidity to the credit markets.

  4. david says:

    WB: 3 different articles I read yesterday – the one in the NYT, one over at Bloomberg, and one somewhere else – all said that they would be using more taxpayer money for this. So I am curious why you think they won’t be?

  5. WealthBoy says:

    Can you site the articles? I’d like to read them. The Fed generates its own revenue primarily from interest on U.S. government securities. Take a look from the P&L from last year. No where on the income statement does it say anything about revenue from taxes. I suppose you could argue that they indirectly make money from taxes since they are the recipient of the interest paid on our national debt. However, I believe the Fed already has the capital on hand to purchase the commercial paper they’re buying. I don’t believe they would have the capability to implement strategies like this so quickly if they didn’t.

  6. david says:

    The NYTimes article is linked from my post here. As for the others, they are long gone (wrote this late last nite) but if I can find them, will def. post them up here.

    I understand that the Fed supposedly is independent, but I am starting to doubt that reality in the current situation.

  7. WealthBoy says:

    The NYT article does say:

    “While the move will put more taxpayer dollars at risk, it underscores the growing sense of urgency felt by policy makers in a climate where lending has virtually dried up.”

    I’m not really exactly sure what the authors mean when they say it will put more taxpayer dollars at risk. That statement doesn’t make much sense to me. If the Fed incurs any losses on the commercial paper, it would represent a loss for the Fed not for taxpayers. It’s too bad the NYT doesn’t have comments. I would definitely ask them to elaborate on that particular point and explain how exactly it puts more taxpayer dollars at risk.

  8. […] Fed to Now Consider Buying Businesses Unsecured Debt: My Two Dollars […]