Since the U.S. Treasury market froze in March 2020 at the outset of the Covid crisis, policy makers have been laudably concerned with improving that market’s liquidity. But as two of the people in the engine room during that fateful month, we believe there is a broader concern: the structural implications of our financial system’s increasing reliance on short-term wholesale funding.
Today, short-term wholesale funding is one of the main ways that large companies finance their operations. Large enterprises regularly issue commercial paper: short-term notes that generally have a life of 30 to 90 days, which the companies expect to renew at maturity. The odds of something happening to the credit of a large, stable public company within 30 days are low, so the company can issue this paper more cheaply than it could get credit from a bank. The efficiency of this system supports a more robust and faster-growing economy than one purely reliant on bank credit—until it doesn’t.
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