An Example of Credit Freeze Fallout

One of the challenges for politicians, financial experts, and pundits over the past few weeks has been in explaining what the fallout of financial failures, and the subsequent impact on credit markets really mean.

It boils down, I think, to an evaporation of faith.  For businesses to be transacted, the seller has to have faith that he/she will be paid, and/or that the risk of default is small enough that it can be addressed with a slight surcharge in the selling price.  Perhaps an additional guaranty is required if the buyer’s credit is unknown or unsatisfactory, in which case a bank or credit insurer can step in to facilitate the deal.

But what if the risk of non-payment is feared to be substantial, and the usual intermediaries are feared to be untrustworthy?

Consider this article from the Financial Post:

The credit crisis is spilling over into the grain industry as international buyers find themselves unable to come up with payment, forcing sellers to shoulder often substantial losses.

Before cargoes can be loaded at port, buyers typically must produce proof they are good for the money. But more deals are falling through as sellers decide they don’t trust the financial institution named in the buyer’s letter of credit, analysts said.

"There’s all kinds of stuff stacked up on docks right now that can’t be shipped because people can’t get letters of credit," said Bill Gary, president of Commodity Information Systems in Oklahoma City. "The problem is not demand, and it’s not supply because we have plenty of supply. It’s finding anyone who can come up with the credit to buy."

Oops.

While I am very uncomfortable with just how much governments are indicating they will butt into the marketplace, there is something to be said for a still-at-least-somewhat-trustworthy agency (the government) stepping into the chaos to say, “we will make the market; we will stand in to facilitate transactions until cooler heads prevail”, if only to remove the incremental damage that could be caused by excess hysteria.