Coordinated printing by the world's central banks.

Wow.

Just...wow.

That graph shows not a "flight" to quality, but a rocket ship.

From WSJ:

J.P. Morgan Chase stops trading with Citadel Investment in dispute over hedge fund's hiring push. Full story to follow shortly.

Please excuse my numeric poetry:
AGG (iShares Lehman (remember them?) Aggregate Bond Index)

High for the day = 100.666

Traders have a sense of humor.

Christ, I've been so fixated on Morgan/Goldman etc that I didn't even look at the money market custodians: NTRS, STT.

Cliff diving.

But the volatility is 70+ on NTRS. No sensible trade to be made there at these prices.

I'm changing over to Wu-Tang Financial:

Nowadays we all know that cash rules everything around us. C.R.E.A.M. Get the money. Dollar, dollar bill y'all.

That's why its time to enter the 36 chambers, and step to the Wu.

Serious question: Market dive corresponds exactly to Bush statement timing.

He has a history of speaking happy horseshit during delivery elsewhere of bad news (he held a news conference opposite Bernanke's testimony. See Jon Stewart's coverage on YouTube, it's priceless.)

So I am wondering: Was there some other piece of bad news that happened at that time that I missed?

excellent post CR.

this is why i started coming here.

thanks for all you do.

MarketWatch (and apparently CNBC, from the source who I got the headsup), is saying:
"Putnam liquidates money market fund"

They were run, and they probably are getting "no bid" on their CP and other paper.

Not good at all, if true.

oh oh...

I poked around in historical paper spreads and IIRC this is about the level of the early '80s recession (maybe a bit higher) Not the end of the world, although certainly bad. Unfortunately I forgot to save the link so I'm trying to track that info down now.

Just a little math to get heads around this:

CP is coupon, unlike bills, but if it WERE discount, the difference between par and price is
((rate/360)*days to mat)

So, a 280bp rate on 90 day paper would be 280bp/360*90 = 70bp, so the price reduction would be 0.7% of face value.

MM funds generally run very close to the buck, so that's how the buck gets broken.

This seems OK to me, but if you think otherwise let me know

Why take the chance?

There's two big risk factors here:

1) If there are MM runs to the point they have to temporarily suspend redemption, the public's panic and loss of confidence would be hard for the Fed to control;

and

2) CP is always refinancing, and corporations working capital depends on it; that's what the name means: the paper funding commerce.

If the CP market locks up, the FED can step in to provide interim liquidity to the banks to loan to corp's that can't access the CP market, or they can again invoke 13(3), the provision that allows the Fed to lend to anyone.

One way or the other, the Fed HAS to get the CP market unfrozen, if they can, or the virus spreads from the FIRE sector to the real sector.

The law of unintended consequences...

If anyone knows of, or finds a site that provides an aggregate CP refunding schedule, please post it.

Newbie writes:
we are f**ked. The economy is going to be in for a severe contraction.
Newbie | 09.18.08 - 12:24 pm | #

That's not me. I am the orginal "newbie" w/o caps.

One way or the other, the Fed HAS to get the CP market unfrozen, if they can, or the virus spreads from the FIRE sector to the real sector.

At this point we're in a liquidity trap and the Fed has to inflate. Barring the possibility that this is a very brief panic and will clear up in a day or two, we're in for a depression. Not necessarily a great depression, but a depression. Right now we're heading into ye olde-fashioned Fisherian debt trap where nobody buys assets because they're going to drop in value causing them to drop more in value, etc.

The solution is to run inflation high enough that the asset value of cash is also dropping, and somewhat faster than the economy as a whole, so that people will actually buy stuff and there are markets to work out exactly how much each asset will have to be marked down. Of course you don't want inflation higher than that because the inflation will cause waste and dislocation. But a mild inflation will produce far less dislocation than any depression.

Great chart!

What stock is this? Can I buy that stock?

Looks like a great stock to buy! More gains than buying google at IPO!

folks, it's time to get acquainted with something called GE Capital. we may be hearing as much about it in the next month as we heard about AIG in the last month.

GE Capital leases a lot of airplanes (they build engines so there is a tie-in). They also do truck and car leasing as well.

But, they are known to be pretty conservative group.

B. Dewhirst: Briefly, "paper" here means unsecured short term IOUs of corporations. In the old days, they were actually physically printed as bearer instruments just like currency, but of course no more. Corporations fund their working capital: accounts payable and payroll, mainly, with this.

This is not related to Asia. This is related to the flood of non-govie securities being offered for sale as funds scramble to reduce their perceived risk (and real risk, too, but to a far lesser degree).

That locks out corporations that have to come to market to "roll over" their IOU's.

Generally, CP funds quarterly. This is Sept: end of a quarter.

B. Dewhirst: I'll do the best I can with a couple of your questions.

""what is "paper" in this context?" Short term (always less than 9 months, but usually only 30 days) loans for companies, basically used to smooth cash flow.

"What is actually being -measured- in that chart?" The difference in the interest being charged to "good" paper (i.e., from very sound company with virtually no chance of defaulting since the loan is for such a short time, such as 30 days) versus "bad" paper (i.e., from a not quite so sound company whose chance of defaulting is a little higher, although still not that high since, again, this is a very short term loan). As Fair Economist pointed out, the spread here is the biggest it has ever been (at least going back a few decades), showing that there is great fear by lenders to loan to anyone who might not be considered virtually default-proof.

Note: this is not my area of expertise (at all), but that is my understanding of this. If I've screwed something up, someone else please chime in to correct it.

See, this is Bernanke's worst nightmare: credit disruption begets corporate insolvancy begets layoffs or missed payroll begets spending curtailment and savings/hoarding begets ... well, we all know the rest.

That said, the system has actually been staring into this abyss before. Twice in 1970 alone, in fact. The Fed was able to bring it (CP market) back to life then, and probably other times as well.

It ain't over yet, but it is dangerous.

@Austin Tex:

Yes, they can inflate to the extent that they can "helicopter" in money, which means give it to people directly. The normal way is to fund the federal government through the inflating cash. Theoretically they could also make loans directly to the entities that need cash (ie issue A2 paper and such themselves) although I don't see how they could set up the institutional expertise and infrastructure to do so on such extremely short notice. They could also take over a failing institution that does this and use their structure and expertise although that would create massive crowding-out problems because other institutions would have to transact business in competition without the Fed's backing, which I would think is impossible.

So IMO the best approach is to start printing money for federal operations. They should start immediately because although that's a big hose they can't use all of it and they may need a lot.

The trick, I think, is to do it more like a currency depreciation where they dump out a lot of money quickly, drop real asset values, and stop. If people expect ongoing inflation that will create nasty additional pressures on the banking system.

40 billion is about 5% of M0 and should be enough if it's used to inflate. The way the 40 billion was described sounds like they were trying to sterilize it or maybe even pull out the cash. The problem is making it feed through fast enough, which could be very tricky.

Don't know about links, but the two instances were
(1) the BK of the PennCentral railroad, which was induced by their inability to roll over their CP, which in turn threatened the collapse of the CP market on Monday (the BK was on a Friday night),
and
(2) the failure (surprise, on a Friday!) of what was at the time the fourth largest broker, whose name I do not remember.

One good source, and as an economist, even more of a understandable read, is the book (out of print) by "Adam Smith" (Jerry Goodman) named "Supermoney."

It documents the 1970 incidents, and others, in the chapter "The days the music almost died." 38 years ago, and then again, the same.

Fair Economist, BTW: thanks for the explanation. I need to re-read it, of course.