How the Commercial Paper Markets Seized Up

Alex Blumberg and Adam Davidson continue to perform a valuable public service by explaining complex financial market issues in terms that normal people can understand.  Their latest radio piece, broadcast on NPR on Friday and now available at NPR’s “Planet Money” blog, explains how the commercial paper market seized up, threatening to bring daily commerce to a halt. A longer version will broadcast on This American Life.

An earlier piece by the two, Giant Pool of Money, which was highlighted on Research Recap in May,  gets admiring coverage in today’s New York Times. Excerpts:

“Mike Garner, a bartender in Nevada turned mortgage bundler ….  said that market appetites for anything that resembled a mortgage pushed loan standards down: ‘No income, no asset. You don’t have to state anything. Just have a credit score and a pulse.’ (Mr. Blumberg pointed out that the pulse thing was optional: 23 dead people in Ohio were also approved.)”

“It was clear even last spring that the people who perpetrated this fraud knew at some level what they were doing.”

“Mr. Davidson said that the idiosyncrasy of the instruments, combined with the overlay of technology, allowed the traders to live in denial. They would sit at terminals and use data — historical data that had been gathered before they started giving out money to people with no ability to pay — and decide that the risks were manageable. All of it was unreal, ineffable, tough to know. Except the way it turned out, as Mr. Davidson notes near the end of the story.”

“It’s as if the global pool of money thought it was putting trillions of dollars in a savings account, but really, half of it was going into a furnace. The money is gone, burned up, never to come back.”