Corporate bonds were simply not being bought, at any price. Same with commercial paper. Nobody knew what firms were going to still exist in a week so nobody was willing to lend any money at all.
> Nobody knew what firms were going to still exist in a week so nobody was willing to lend any money at all.
Perhaps I'm misunderstanding, but isn't this another way of saying it was too risky for people to invest? That seems to be the same concept as the quote you cited from the parent comment: "either the return wasn't commensurate to the risk".
I guess you could say that but the underlying problem was that the risk was entirely opaque so it couldn't actually be quantified and hedged against. The TARP loan ("shakedown" might be a better term honestly) gave financial firms time to sort out what their actual positions and exposure were; there wasn't time to let the market sort that out over months and at the cost of every major company (even non-financials) failing because of lack of access to credit.
The problem is circular. The risk is that your counterparty goes bust. Therefore nobody wants to make any moves until they can be sure that (mostly) every other player is stable. But because no moves are happening, that in itself is destabilizing.
That is, the big risk is "what if the state doesn't intervene?"
Correspondingly, the state has a special move that only it can play, because "what if the state doesn't intervene" is not a risk to the state itself. The act of intervening makes the risk go away. That's part of the privilege of being the lender of last resort with the option to print currency.
(which is why this was a much more serious problem for Greece and Ireland, which as Eurozone members were constrained in their ability to even contemplate printing their way out of the problem!)
Corporate bonds were simply not being bought, at any price. Same with commercial paper. Nobody knew what firms were going to still exist in a week so nobody was willing to lend any money at all.
> Nobody knew what firms were going to still exist in a week so nobody was willing to lend any money at all.
Perhaps I'm misunderstanding, but isn't this another way of saying it was too risky for people to invest? That seems to be the same concept as the quote you cited from the parent comment: "either the return wasn't commensurate to the risk".
I guess you could say that but the underlying problem was that the risk was entirely opaque so it couldn't actually be quantified and hedged against. The TARP loan ("shakedown" might be a better term honestly) gave financial firms time to sort out what their actual positions and exposure were; there wasn't time to let the market sort that out over months and at the cost of every major company (even non-financials) failing because of lack of access to credit.
5 replies →
The problem is circular. The risk is that your counterparty goes bust. Therefore nobody wants to make any moves until they can be sure that (mostly) every other player is stable. But because no moves are happening, that in itself is destabilizing.
That is, the big risk is "what if the state doesn't intervene?"
Correspondingly, the state has a special move that only it can play, because "what if the state doesn't intervene" is not a risk to the state itself. The act of intervening makes the risk go away. That's part of the privilege of being the lender of last resort with the option to print currency.
(which is why this was a much more serious problem for Greece and Ireland, which as Eurozone members were constrained in their ability to even contemplate printing their way out of the problem!)