Fixing the Credit Markets
Ed Paisley
What happened?
What happened was financial institutions and investors around the world are scared to deal with each other. They are concerned that they don't know about hte bad debts that financial institutions hold and they are concerned that the companies that issue paper in the credit markets--that issue debt in the credit markets--will not be able to pay it back in three to five days. Most of this concern is very unwarranted. But because there are worries in the credit markets, by investors and financial institutions that some of them can't cover their debts no one is willing to lend.
Why does it matter?
The reason it matters to the average American, well, it matters for two reasons. It matters to those who borrow because these credit markets set the interest rate upon which you borrow on your home, you borrow for your car, for your credit card rates. When those interest rates are going up because no one trusts lending to each other, that hits you immediately.
The other reason is because, in the credit markets, that's where companies go to borrow short-term funds so they can make payroll, so they can pay their suppliers, suppliers that you may work for, and so that they can cover the cost of interest rate charges when people purchase something from companies, before they get it back from the credit card issuers.
In those three ways, if companies and financial institutions can't access the credit markets for this short-term funding, they can't make payroll. They can't do these things. That's very dangerous to the health of the U.S. economy, quite obviously.
What should we do?
The reason that Congress needs to pass this financial rescue package is not to go out and save some billionaires, it's to rescue the U.S. economy. Right now Congress if they act and they act quickly, investors and financial institutions around the world will have the confidence the US government understands the severity of the crisis and is acting to help financial institutions cope with their bad debts and their bad securitized assets. These are complicated financial instruments and complicated problems but at the root of all this is confidence. If there's not confidence in the credit markets, the economy grinds to a halt. Taking these steps will help restore that confidence.