Credit freeze somewhat overstated
Until today, I had gotten the impression from reading the financial press that credit—including the kind of short-term credit that companies need to pay for day-to-day expenses—is extremely difficult to obtain. Indeed, this was put forth as one of the main reasons why a bailout plan for financial firms is needed. However, a Bloomberg article today entitled, "Industrial Companies Can Thank Banks for Lower Rates" shows that this is an oversimplified picture. While financial firms and companies with poor credit ratings are having difficulty borrowing in the commercial paper market, strong non-financial firms can obtain credit at pretty good rates. Here is a chart of 30-day money market interest rates during the month of September.
The chart shows that interest rates for financial firms have gone up somewhat over the course of the month. Rates for non-prime ( A2/P2 in the Federal Reserve Board's terminology) non-financial firms have almost doubled during the month. But rates for prime (AA) non-financial firms have actually gone down a bit. (Unfortunately, the Federal Reserve Board doesn't provide information about rates for non-prime non-financial borrowers.)
I actually find this reassuring. The credit markets do not seem completely frozen up. Financial firms are finding it more difficult to borrow in the money markets. But it's not at all surprising that financial firms would find it more difficult to obtain credit given the well-known difficulties they are facing. It is also unsurprising that companies with poor credit ratings would have a harder time borrowing during an economic downturn. The market seems to be reacting more or less rationally to actual economic conditions. The low interest rates for prime non-financial borrowers indicate that the market is not irrationally panicking and withholding credit from stable credit-worthy customers. While the contraction in credit will undoubtedly continue to affect the economy, there seems to be no reason to think that it will cause a complete shutdown of our economy.
More information about money market interest rates is available at the Federal Reserve Board Web site.