the freeze in money flow

The remarkable and unprecedented thing going on right now in the markets is an utter shutdown in the transfer of commercial money. You normally don't see this transfer because it done between companies. Companies with extra cash put that money to work through Wall Street. Money market funds that hold consumer money put that money to work through Wall Street. Banks themselves with extra money put that money to work through Wall Street. That has all seized up right now.

As an example a company flush with cash like Apple or Microsoft doesn't typically want to sit on that cash. It will lend it out on a very short term basis. Companies that do need cash will take that money and pay interest on it. They'll then use that money to fund things like working capital (e.g., buying raw materials or buying new equipment). Right now no one is really confident enough to lend their money out and those that are do it on a very short term basis. "Will I get it back?" is what is going through their head.

This short term lending greases the wheels of commerce. When it stops or if you think it will not be available in the future you are going to severely cut back on spending. AT&T said yesterday that they were unable to 'roll' their old debt with new debt unless it was an overnight lend. You can be sure that the CFO of AT&T is sending out emails across the board for his captains to reign in spending. He isn't entirely sure he'll have money tomorrow.

The LIBOR rate, or the London Interbank Offered Rate, is an average of the rate that about 20 banks charge to lend to other banks. The 1 month lend has shot from 2.5% to 4.0%. Essentially banks just aren't lending to each other because they do not trust that they'll get the money back.

The most valuable thing Wall Street does, is not taking a company public or investing money. It is facilitating the movement of money. The fact that you can buy a house with a mortgage funded by money from a pension fund in Sweden is a remarkable and valuable service. Was a remarkable service. But with no one lending it is awfully tough to get financing now. Auto lending is difficult. Mortgage lending is probably available through banks which has deposits to fund those mortgages. Banks aren't lending to one another. And companies that need short term lending (commercial paper) can't get it to fund their businesses. If this holds up for much longer we will see a dramatic downtick in the economy. This is part of what is driving the bailout plan. To try and get lending to start up again.

But if it does fail to get things started, we will be on a fast track to rightsizing our economy. It will be horribly horribly painful though.