Seems to be unwinding in an orderly fashion as lending continues to flow back to the banking sector.

UPDATE 1-US commercial paper in biggest weekly drop since Aug

Thu Dec 20, 2007 10:41am EST

NEW YORK, Dec 20 (Reuters) – The size of the U.S. commercial paper market suffered its biggest weekly shrinkage since late August, after credit market turmoil first erupted, the Federal Reserve reported on Thursday.

The overall U.S. commercial paper sector shrank $54.7 billion to a total $1.784 trillion outstanding in the week ended Dec. 19; a
development that was likely to increase concerns that strains in short term lending markets are intensifying at year end.

“The data are likely to add to anxieties about credit conditions,” wrote Tony Crescenzi, chief bond market strategist, Miller, Tabak & Co. in New York in an email note.

The U.S. asset-backed commercial paper market, which has been hard hit by its exposure to subprime mortgage securities gone bad in the U.S. housing slide, shrank for a 19th straight week.

The asset-backed commercial paper segment, which had once helped to fuel the housing boom, fell $27.5 billion to $763.5 billion following last week’s $10.3 billion fall. The size of the ABCP market is the smallest since August 2005.

Unsecured commercial paper issuance by financial firms contracted by $28.6 billion the week ended of Dec. 19, a reversal from the $9.0 billion rise in the previous week.

3 Responses

  1. My framework:

    It seems the quantity of commercial paper loans has a limited impact on GDP. Most commercial paper is used for ‘funding’ rather than ‘spending’. ‘Funding’ has a very low velocity even though it is a large quantity and therefore has a very limited impact on GDP.

    Commercial paper loans by nonbanks shift bank deposits from holder to holder but create no new bank deposits.

    Ford Inc. borrows bank deposits from those that are willing to make commercial paper loans be they nonbank lenders or the banks themselves.

    As nonbank money (commercial paper loans) fall, the velocity of bank money used for spending may be falling due to fewer commercial paper loans shifting bank deposits but the quantity of bank money hasn’t fallen at all and has actually increased indicating overall rising GDP.

  2. the increase in ‘bank money’ is probably due to the increase in bank loans as ‘loans create deposits (and reserves as needed).

    also, cp has picked up again, indicating investors are willing to undercut bank interest rates and again price risk lower than the banks can. it’s a sign of things ‘returing to normal’

  3. “the increase in ‘bank money’ is probably due to the increase in bank loans as ‘loans create deposits (and reserves as needed).

    I agree.

    My framework:

    bank loans create bank deposits. Reserves are created as needed.

    nonbank loans create nonbank deposits while shifting ownership of bank deposits.

    bank deposits are superior to nonbank deposits in their ability to be spent.

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