Apparently, $700 billion along with tax incentives and other inducements are not enough to reassure the financial markets. And today the Federal Reserve is taking yet another step beyond the gigantic financial bailout. The Fed says it will in effect loan huge amounts of money to American corporations. This amounts to another transformation on how the U.S. economy works. NPR's Adam Davidson has been covering this story. Adam, good morning.

ADAM DAVIDSON: Good morning, Steve.

INSKEEP: What kinds of loans are these to companies?

DAVIDSON: This is really short-term debt. I think of it as like a huge industrial-sized IOU. You know, I'm a big company. I need a few bucks to get me through the weekend to pay payroll, or to buy...

INSKEEP: Or a few billion bucks, perhaps?

DAVIDSON: Or a few billion bucks, as the case may be. I call you up. You're another company who has a little extra money. And I say I'll give you this commercial paper, this short-term bond. Its face value is a billion dollars, but you only have to pay $990 million for it. You give that money to me today, and next week I'll give you the billion. You'll make a little extra money. I'll have money to get me through the week. Both of us come out ahead.

INSKEEP: Now, is this something that companies are doing all the time?

DAVIDSON: Huge, huge, hundreds of billions of dollars every day. I mean, this is the boring routine functioning of the U.S. economy. This is - if you work for a big company, there's a good chance that's how you get paid. When they buy a whole fleet of new cars, or they buy a bunch of new computers, or whatever, this is the money that allows them to spend future earnings today. But it completely broke down about two and a half, three weeks ago. That is the moment that really freaked out Ben Bernanke and Henry Paulson, and made them say we have to do the $700 billion bailout. If totally safe, reliable, trusted companies can't convince people to lend them money, then this whole economy faces ruin. We have to do this $700 billion bailout.

INSKEEP: OK, just to make sure we understand what's going on here, Adam Davidson, you've got companies in some weeks that make more money, in some weeks they make less money, so they borrow a little money to smooth things out and keep their operations going. Because of a loss of trust in other companies and a panic mood, people have stopped lending money to each other. And so what is the federal government going to do about it?

DAVIDSON: Well, what the Fed announced today is that they will now effectively back up these loans. So if you are thinking of lending money to let's just say GE, just to use an example - I'm not saying they're good or bad, I'm just using them as an example - you're thinking of lending money to GE, maybe yesterday you'd say I'm not lending money to anybody. I just don't trust anybody at all. I feel panic. Today you might say, well, GE, like any big well-respected company, is now backed up by the Federal Reserve. So I know my money is safe. I'm willing to lend them money. I think what the Fed is hoping is that that degree of confidence will make you lend them money, and they never have to step in and actually back up GE or whoever else's commercial paper. Of course, that has been their hope all along, and almost every time they do have to step in.

INSKEEP: Well, let's talk about that, Adam Davidson, because we just had Congress and the president approve $700 billion of intervention in the financial markets. Does this additional step mean that that bailout was not enough?

DAVIDSON: It clearly was not enough to open up the commercial paper market. The reason it might have been enough is that one of the reasons folks are nervous about lending money - the reason it might not be enough, one of the biggest users of commercial paper are big banks. And those big banks have these toxic, horrible assets we've heard so much about. And so the idea was that the Federal Reserve - so the idea was that the Treasury Department will buy those toxic assets, and then people would feel more confident and comfortable in lending them money through the commercial paper market.

Well, they're not going to start buying anything for another month. Also, that $700 billion really doesn't cover a lot of companies. It covers banks and financial institutions that own toxic assets, but the commercial paper market covers the entire gamut of businesses. So they clearly felt this was a necessary move in addition to the $700 billion.

INSKEEP: Oh, now you mentioned it might be another month to really seriously get started on this. Are you saying that people were so worried about the future of major banks and other corporations that they worried that these companies could collapse in a matter of days and they'd never get their money back if they loaned it?

DAVIDSON: I mean, this has been a few weeks of some of the most storied banks in America collapsing in hours. And that's the thing about the commercial paper market. A lot of banks have a model of borrowing money on a very short-term basis because you tend to pay very low interest rates when you borrow on a short-term basis, and lending it out on a long-term basis, because you get more interest coming back to you that way. And that means if you lose confidence and you're a big bank, you collapse in an afternoon. You can't survive a bad afternoon. And we've seen that again and again throughout this crisis. So yeah, a month is an eternity in a time like this.

INSKEEP: Adam, thanks very much.

DAVIDSON: Thank you, Steve.

Copyright © 2008 NPR. All rights reserved. Visit our website terms of use and permissions pages at for further information.

NPR transcripts are created on a rush deadline by a contractor for NPR, and accuracy and availability may vary. This text may not be in its final form and may be updated or revised in the future. Please be aware that the authoritative record of NPR’s programming is the audio.



Please keep your community civil. All comments must follow the Community rules and terms of use, and will be moderated prior to posting. NPR reserves the right to use the comments we receive, in whole or in part, and to use the commenter's name and location, in any medium. See also the Terms of Use, Privacy Policy and Community FAQ.