Saturday, September 20, 2008

What spooked Paulson and Bernanke?

The decline in demand for commercial paper (used to purchase inventory or manage working capital) caused price of commercial paper to fall and the interest rate to rise. (inversely related to price). Quantity fell. [Note: the suppliers of loans demand commercial paper.]

[thanks do Doc for correcting me on prices vs. interest rates]


  1. I'd have said that the demand for commercial paper dropped, causing the equilibrium price (market value of an instrument) to *fall* (with an accompanying *rise* in the associated interest rate) and the equilibrium quantity to fall as well.

    Did people stop wanting to sell commercial paper, or (because of risks that are now perceived to be much greater than in even the recent past) did people stop wanting to buy commercial paper?

  2. I stand corrected. It is easy to get confused in this market because the price is inveresely related to the interest rate.