But first, a brief tutorial:

Commercial paper is basically an unsecured loan that businesses make to each other. It’s like when you get out the credit card toward the end of the month to smooth things out as they get a little tighter. Basically, a company says, “I need $500 million to make payroll this week, but income has been a bit down. I don’t have $500 million in ready cash.” Then the company goes to another company, that has a surplus, and says, “I’ll give you this I.O.U. for $600 million if you front me $500 million to get me through the week.”

This isn’t happening anymore. The liquidity isn’t there. Banks aren’t lending to each other, and the $700 billion bailout hasn’t done anything to thaw the credit market freeze. That is why the Fed is stepping in. Supposedly, Fed actions aren’t going to really use our taxpayer dollars, because the Fed can do things to create its own “money.” It will either buy the unsecured debt outright, or issue emergency short term loans. In either case, liquidity theoretically will be increased, easing the credit market situation. It will probably result in inflation as well. (For an interesting argument on the necessity of inflation to get our economy on track, read this post on Stock Trading to Go.)

What does a credit freeze mean for you?

More dangerous than a stock market crash, a credit freeze has direct consequences for the reast of us “regular” folks. Most of us see it in terms of personal credit:

• Car loans.
• Private student loans.
• Mortgage loans.
• Credit cards.
• HELOCs are being frozen.
• Interest rates go up in some cases, especially on mortgage loans.

In some cases, this might be a good thing. It means that we have to re-evaluate our priorities and figure out what we want to spend our money on.

There are indirect effects as well, though.

Many universities, hospitals, large government contruction projects (like roads and other infrastructure) and other organizations rely on bond funding. In the last two weeks, interest rates on this sort of bet have skyrocketed — from below 3% to above 7%. This means that some projects will have to be cancelled, because they have become too expensive. For hospitals, non-profits and other institutions, it means staff cuts and service cuts. That means that the jobless rate is likely to continue to rise. And if you make use of some public service…

The effects on small businesses, the true engines of our economy, are also going to be great. If the big guys can’t get loans, small businesses don’t have a prayer. This credit freeze means further job losses from small businesses, as well as probably cuts to benefits. All of this coming on the heels of decreased revenue, since people can’t spend.

It is a sad fact, but a fact nonetheless: Our entire economy runs on credit. And if we don’t have the liquidity to keep it going, things could get really ugly.

What do you think of the economy?

Post from: EveryJoe

The Credit Market Freeze — How It Works And How It Affects You

Of course, it’s kind of a necessity at this point. After all, with Fannie and Freddie responsible for significantly more than half of the mortgages in this country, it would be rather devastating to the entire economy for them to fail. So the government steps in.

I think now is a good time to hope that not too many mortgage loans have been taken over or made since the loosening of standards that the government allowed earlier in the mortgage market crisis to help ease things.

Post from: EveryJoe

Taxpayers: You Are Now on the Hook for Fannie and Freddie

There are many lessons to be learned from the subprime lending crash. One of those is that you should be carefully of what kind of mortgage loan you get. Another is that good credit can be invaluable.

The fact of the matter is that if you have good credit, there you can still get a house, despite the tightened lending standards. And, you can take advantage of lower mortgage rates, since the mess is making home buying rather unattractive at this time and lenders want to lure buyers in.

If you can swing it, now may be a good time to make an investment in a second home. For all the reasons listed above. And the special tax adavantages that come with an investment property.

The idea behind yielding wealth is to look for opportunities that come from disasters. If you keep yourself in a good place financially, then you will be poised to take advantage of what comes along.

Post from: EveryJoe

Finding Opportunities: Subprime Lending Crash