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

No, the bailout plan isn’t some magic cure-all.

This is stuff we’ve seen coming for weeks now.

So now is not the time to start panicking.

Nor is it time to give in to fear-mongering. (I’m talking to you, CNN! Compare these two photos — thanks markzero — and see that far from being in a panic, the guy is just talking into his microphone: CNN cropped photo vs. Yahoo! full photo.)

Take a look at your investment portfolio and at your personal finances. Do what you can to get things in order.

Investment portfolio

Look at your allocation. Is it weighted somewhat conservative? Do you have a good mix? Index funds? Companies that are likely to survive? Try to avoid looking at your retirement account statement, and remind yourself that over the long haul, the stock market gains. Consider unloading only the especially vulnerable investments. If something still has solid fundamentals, stick with it.

Also, consider cash investments right now. You won’t get big returns, but many of them are guaranteed, including a recent guaranty for money market funds and also an increase in protection for FDIC-insured accounts. They can present a reasonable way to get some return for those who have a lower risk tolerance and are especially concerned about riskier investments.

Personal finances

It’s back to basics here:

• Try to reduce your debt as much as possible.
• Redo your budget and cut out the non-essentials to ensure that you spend less than you earn.
• Look for true bargains.
• Try to find ways to earn a little more money to pad the emergency fund.

Chances are, you are not going to see an immediate impact from this. But down the road, things could get a little rough. With proper preparation now (even better if you’ve been preparing for a few weeks or months  now), you should be able to weather things fairly well.

What are you doing to prepare for the future?
Disclaimer: I am not an investment professional. Nothing in this piece or on this Web site should be construed as investment advice. Before making investment decisions, do your own research and/or consult with an investment professional. All investment comes with the risk of loss. You are responsible for your own investment decisions and any loss that may result from your decisions.

Post from: EveryJoe

Stock Market Crash 2008: Stop Panicking. Seriously. Stop.

October has the reputation as being the scariest month of the year and not because it is the home to Halloween. All of the really big market plunges — 1929, 1987 and even the mini-smashes of 1989, 2000 and 2002 — all happened in this month so investors are understandably concerned.

But all is not lost. It is also worth considering that in the yearly stock market cycle, the best time of the year is November through April. That’s right. The big retail holidays of Halloween (it IS at the end of the month, after all), Thanksgiving, Christmas (Christmas! Christmas!), New Year’s, Valentine’s Day and Easter all fall in that window. So the stock market is usually supported by the spending masses.

But will that still be the case in the current credit market crunch? Indications are that consumers are hanging back a bit, especially those feeling the squeeze from resetting mortgages and other credit market crash issues.

While a huge stock market crash isn’t THAT likely, a dip or a correction wouldn’t be a surprise. And if you are there to get in on some of the bargains, you may see good results down the road.

Post from: EveryJoe

Will the Stock Market Crash This Month?