Money, Banking and finacial marketWhy did you think the amount of commercial paper outstanding fell significantly duting the 2007-2009 financial crisis?
As can be seen in the thread of these posts, it's all about the money and the fearful climate of our financial crisis. If you've read anything about the Great Depression, or know people who have lost jobs and perhaps their houses, you can get a sense of why people are fearful about money. We realize that many businesses are in the same boat as the American public, simply trying to get by. The sense seems to be that if we weather the storm and get through, things will be easier—then we can all make financial moves we are afraid to make now.
In terms of commercial paper, if something is unsecured, it's like playing the stockmarket. If the stock bellies up, the money is gone. However, the difference is that the stock market can turn around (as we have seen recently) and the value of stocks can increase. Money lost on a note for which no collateral has been put up, will never be seen again. It's too great a risk to take in this financial climate.
I wonder if there is any parallel here between the risks cited above and the risk the U. S. Treasury now faces that investors and other nations will stop financing the debt of the U. S. government. Already the Chinese have apparently cut back substantially on their purchsases of U. S. securities. As I understand it, if the U. S. dollar ever ceases to be the world's reserve currency, our economy will be in even greater trouble than it already is. One thing that is helping us a bit is that the Europeans have got themselves into even more of a mess than we have. I always suspected (as I watched the size of the national debt and the amount of unfunded liabilities grow and grow and grow) that something like these problems would happen some day. They now seem to be upon us, and, if anything, they seem destined to get worse.
The amount of commercial paper outstanding falls during times of economic distress as people want to get out of anything that has a lot of risk. In 2007-2009 when companies with the largest market capitalization were going bankrupt, it would be nearly impossible for someone with commercial paper to not fear that it might be worth just the paper the agreement has been printed on the next day. This led to people liquidating the commercial paper with them even if it meant taking a small loss.
The simple answer for this is summed up in the word, "risk." If you recall in 2008, unthinkable things happened. We say the collapse of huge investment banks. More would have failed, but there were deals that were structured that larger banks like J.P. Morgan Chase bought out smaller firms. In this climate, no one wanted more debt. Truth be told, the financial system is so complex, that no one really knows what is going on. All they know is that in 2008, no one wanted more debt.
As the booms of the 80s and 90s fall far behind us, and as knowledge becomes more and more available, we begin to understand how speculation has crippled the economy to a great extent. Commercial paper is just one aspect of this, and the other posters are correct; smarter investors refused because of the high risk, and so its value continued to fall as more people stopped investing.
Commercial paper is something that is only secure in a situation of steady economic prosperity and financial stability. During the economic crisis, commercial paper involved far more risk because of the way that supposedly stable companies one day went bust the next day. This was why less commercial paper was a feature of this period.
There are two likely causes. One is that lenders were unwilling to buy commercial paper. This would have been because they did not trust that they would ever get paid back. Another possibility is that more companies did not want to issue debt because they did not want to take on new debt in a bad business climate.
I think it was a combination of both the unwillingess to accumulate debt by issuing commercial paper and the lack of confidence in the credit of other institutions. My guess, also, is that most commercial paper that businesses were willing to take on was asset-backed rather than "floating."