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MY Credit Is Not Frozen (Nor Are Most Others’)

My VISA bill came in today’s mail. Normally its arrival is not an especially joyful occasion. Today, however, the envelope contained not only the bill, but also an offer to lend me money on very good terms. Three checks were provided, and I was invited to use the first one, prior to December 4, to make a payment of up to $X (and I can reveal to you that $X equals approximately 50% of what I expect to earn this year). For this credit, I will have to pay an interest rate of . . . (drumroll please) . . . 0%. Yes, that’s right: zero interest. The second and third checks give me access to any additional amount remaining within my credit limit of $X at an interest rate of 4.99%, fixed until the balance is paid in full.

It’s true, I admit, that I pay my bills on time; my momma didn’t raise no deadbeats. But is it possible that I am a better credit risk than the country’s biggest corporations?

I raise this seemingly idiotic question because I continue to hear that such companies simply cannot borrow short-term funds because credit markets are “frozen.” Just yesterday, on NPR, I heard a Wall Street fellow, identified as the vice president of a financial-information firm, say that no money is moving. He stares at his computer, he says, but for the past several weeks, he has seen virtually nothing, whereas previously the billions flew past so frequently that he had to work like a demon to take note of all the traffic.

Other commentators admit that companies continue to borrow, but they insist that only very short-term funds are available, whereas 60-day and 90-day credits used to be available to the same borrowers. As a result, firms are allegedly having to work frantically from one day to the next to maintain the flow of financing to meet payroll expenses and purchase inventories. Interest rates are said to be extraordinarily high.

Unless the Fed’s system of collecting information on issuances of commercial paper has gone completely bonkers, however, all these claims are wildly off the mark. Looking at the data for the first four business days of the past week, I find that firms sold from $179 billion to $205 billion of commercial paper per day; the number of separate issuances per day ranged from 6,761 to 7,298. Both the total amount borrowed and the number of issuances per day increased steadily throughout the week (data for Friday have not yet been reported).

It is true that the bulk of the activity in this credit market has occurred recently at the very short-term end. On Thursday, for example, 1-4 day funds accounted for 79% of the value and 71% of the issuances. But this concentration at the short-term end of the spectrum is not particularly a characteristic of a current “credit crunch.” In 2007, for example, on average, 69% of the value and 62% of the issuances came from deals for 1-4 day funds.

At the other end of the term spectrum, on Thursday (the most recent day currently reported), for example, 10% of the value and 11% of the issuances came from deals with terms of 21 days or longer. In 2007, on average, the corresponding figures were 21% and 24%, respectively. So, yes, the commercial paper market has moved recently toward the short-term end, but it is not true either (1) that no commercial paper is being sold or (2) that it is being sold, but only for very short terms.

Now, it’s possible, I suppose, that guys interviewed by NPR and self-selected financial bloggers are right, and the Fed’s data-collection system is wrong. If so, however, it would be a public service for the doomsayers to let the world in on this secret, and to reveal (citing publicly accessible sources) exactly why rational people should ignore what is ostensibly the most comprehensive and reliable data source and, instead, believe the manic, unsubstantiated claims now circulating via the news media and the blogosphere.

Robert Higgs is Senior Fellow in Political Economy at the Independent Institute, author or editor of over fourteen Independent books, and Editor at Large of Independent’s quarterly journal The Independent Review.
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