The NYT has an interesting piece describing the set of events that led Secretary Paulson to request a $700 bailout from Congress. It is important to put some of the data discussed in this article in context. One of the charts accompanying the article shows the amount of commercial paper outstanding (short term loans to businesses) falling by more than $50 billion in each of the last two weeks. While this falloff is discussed as an indicator of credit tightening, it is also partially attributable to demand conditions. The cost of corporate borrowing has definitely risen in the last few weeks. While in some cases this may prevent firms from getting the money they need to stay in business (this will most likely be true of firms that were already facing severe financial problems), the drop in commercial paper also partly reflects the decision of many firms to delay borrowing until the costs are lower. Many firms have excess cash right now (especially with the recession leading them to put investment plans on hold), so it would be perfectly reasonable for them to delay borrowing for a few weeks in the hopes that the markets will settle down and they would be able to borrow at a lower interest rate. In other words, much of the drop shown in the chart is likely just an issue of timing, and not reflecting a lack of availability of credit.
--Dean Baker
