Ten years ago, this week, the entire U.S. economy nearly died. It didn’t happen at the moment when Lehman Brothers loudly collapsed, on September 15, 2008. Nor on the day after, before the government and the Federal Reserve bailed out the insurance giant A.I.G., amid almost certainly accurate warnings that not doing so would send the global economy into an even deeper recession.
The near-death moment for the U.S. economy came later that week, when a more obscure event occurred. The commercial-paper market all but froze. Most people, presumably, have never heard of the commercial-paper market, but those who had were terrified. “I don’t think I’ve ever been this nervous in my career,” Paul Balika, of Daiwa Securities told me at the time, “because the financial system was so close to locking up. I think we were close to the abyss.” Balika’s job, then, was to facilitate short-term borrowing by corporations. This sort of job, in normal times, is not at all exciting. It is part of the quiet, back-office routines that allow our economic system to function. On any given day, some companies might have a bit of extra cash on hand; others might need a bit. So people like Balika help the ones with extra money lend it—for a night or a week or a month—to those who need a short-term fix. In September of 2008, this process came very close to ceasing. “And how does capitalism work if you can’t borrow money? You’re back to bartering, pretty much,” Balika told me. “The extension of capital almost came to a halt—just ended, period.”
“There was a monster unleashed,” Mark Peterson told me at the time. He was then treasurer of ServiceMaster, the company that owns several home-services firms, such as Terminix, Merry Maids, and others. He explained that commercial paper is nothing like subprime mortgages, in which deceptive long-term loans are handed out to people who can’t afford to pay them back. Commercial paper is not supposed to be risky at all. Peterson told me to think of Terminix. You call them to take care of an ant infestation, an exterminator comes to your home, and you write a check for the service. There is a lag time between your handing that check to the exterminator and the money showing up in Terminix’s account. Because of the weather, or the season, or simple random fluctuation, on some days, a lot of checks come in, and Terminix has more money than it needs; other days it’s waiting for checks to clear, and it may need a few million to pay, say, a bill for a bulk order of roach poison. Commercial paper is a specialized form of extremely low-risk, short-term bonds—basically a form of an I.O.U. People like Balika, bond traders, arrange the transfer of money from the flush to the temporarily needy. When ServiceMaster needs some money, it calls a bond trader and offers to sell an I.O.U. to another company, that has some extra cash. Then, when ServiceMaster is flush again, it can buy back that I.O.U., and give some of its extra cash to a firm that needs money. (It is a bit confusing that the borrower sells a bond and the lender buys one.) In normal times, this process happens as fast as it takes a broker to hit a few computer keys.
This commercial-paper exchange happens every day between large companies. If you work for a big firm, your salary, from time to time, has likely been paid via this system. Many large retailers need to borrow money all year long, only making up the shortfall in December, with Christmas spending. And the system is something of a miracle—a modest tool that has brought us the modern world. If there were no commercial paper, then every company would need to be far more frugal, holding on to enough cash so that it can always pay its bills with money on hand. Companies would employ far fewer people, make far fewer goods, and sell them at higher costs. The United States and the world would be far poorer.
During that awful week ten years ago lots of companies wanted to sell bonds—they needed cash quickly—but virtually none were willing to buy them, fearful that the bonds would be worth nothing the next day. It was this, more than any of the higher-profile collapses, that inspired the Fed chairman at the time, Ben Bernanke, and Treasury Secretary Henry Paulson to warn of the possible failure of the entire American economic system. Soon, the Fed itself started buying bonds, and the market sputtered back to life, even though it is still not at the peaks it reached before the crisis.
The financial crisis brought attention to the noisy collapse of investment banks and insurance firms, and to the misery wrought on millions of homeowners. But it was, even more, an existential crisis. Stocks are engineered to be risky. Capitalism requires that companies—and those who own them—are comfortable with the possibility of losing money, possibly even all their money, in exchange for a chance to make a sizable profit. When companies fail, and the stock market suffers, it can be unsettling, and many people, especially the rich and retirees, can suffer large losses. Assets such as commercial paper and other highly rated bonds are engineered to be as close to risk-free as is possible. When they begin to collapse in value, or stop being traded altogether, our very lives are at risk. Power plants and gas stations can’t buy fuel; supermarkets can’t purchase food; banks don’t have cash in their A.T.M.s; hospitals can’t buy medicine.
Many of the lessons of the financial crisis that have endured, for those willing to hear them, are important. The big banks were too big, and so they had to be saved. Mortgages and other financial products were designed to deceive. Our financial system was weighted far too heavily in favor of the rich, and against the middle class and the poor. These are lessons that we must abide by, especially with the current onslaught against the Consumer Financial Protection Bureau and other reforms that were supposed to help those without power and to reduce, ever so slightly, the strength of those who hoard it.
But we shouldn’t lose sight of that quieter lesson. Between, roughly, 1880 and 1980, in the United States, the United Kingdom, and a handful of other countries, a financial system grew that allowed for far better lives than most people had ever experienced. That change wasn’t just the result of such breakthroughs as the steam engine and the internal-combustion engine and the telephone. A series of seemingly dull financial innovations went hand-in-hand with those more heroic inventions. Well-functioning, low-risk debt markets are as crucial to our modern lives as antibiotics, the electrical grid, and the Internet.
