Some reactions to the new Federal Reserve plan to buy short-term debt (aka “commercial paper) directly from corporations that have been caught by the credit freeze:
Felix Salmon is “not convinced” that it “is necessarily a great idea.”
“I just wish that the policy response to this crisis was a bit more strategic and coordinated, rather than looking ever more confused, ad hoc, and panicked.”
Dean Baker recalls that last week, Hank Paulson told Congress that “there was no Plan B.” Except, apparently, there is.
They wouldn’t do it unless they had to. And if they had to do it, that they are doing it is very good news indeed.
But let’s give economist Nouriel Roubini, whose track record predicting the crisis looks better every single day, the last word, for now. Roubini spent last week savaging the Paulson plan as insufficient to the task, and called for a much more radical approach to addressing the credit freeze. Turns out, getting the Fed involved in the short-term lending market was one of his key proposals.
This action follows closely one of the radical policy options that I recommended last week: “Direct lending to the business sector from the Fed … to the non financial corporate sector. This could include Fed purchases of commercial paper from corporations and other forms of financing of the short term liabilities of the Administration to small businesses secured in appropriate ways. Given the collapse of the corporate [commercial paper] market and the banking system reluctance to provide loans to the corporate sector (credits lines are being shut down) the only alternative to the Fed becoming directly the biggest emergency bank for the corporate sector would be to force the banking system to maintain its exposure to the corporate sector, possibly in exchange for further Fed provision of liquidity to the banking system. The former option may be better than the latter to deal with the looming illiquidity of the corporate sector.”
I don’t know exactly what kind of portent is conveyed by the Federal Reserve’s decision to start following Nouriel Roubini’s policy prescriptions, but I sure wouldn’t have imagined it likely a year or so ago.
And in a slightly related note, I managed to catch Rachel Maddow interviewing Paul Krugman on her new MSNBC show last night. She asked some good questions, and got some good answers from Krugman, who is pretty clearly rattled by the state of the economy. The final analysis from Krugman: Eventually there will have to be some form of partial, likely temporary, nationalization of the financial system. He spoke before news of the Fed’s commercial paper gambit broke, but I think he would agree that this is just one more step toward that final resolution.
UPDATE: Felix Salmon, who once blogged under the auspices of Nouriel Roubini’s RGE Monitor, but who has been consistently critical of his extreme doom prognostications over the past two years, fulfills the true blogger’s credo today, and admits that Roubini was right.
“Nouriel was right, and I was wrong. The more apocalyptic you were, the more correct you were. And there were precious few people as apocalyptic as Nouriel.”