The Federal Reserve's plan to begin buying commercial paper is another attempt to unfreeze the credit markets that are the lifeblood of the the nation's economy.
Commercial paper is a short term IOU that a business writes to another business or to a bank. For example, a company needing money for a month to buy inventory can go to the commercial paper market to borrow the money and then pay off the debt in 30 days.
Louis Johnston, an economics professor at St. John's University and the College of St. Benedict, said it's mostly big companies that have the standing to issue the short-term debt securities called commercial paper. He says the commercial paper market is really important for the liquidity it offers.
"The person who buys the piece of commercial paper doesn't have to hold onto it, they can turn it around and sell it to someone else, so it's almost like having cash, but you earn a little bit of interest on it," Johnston said. "It's usually a really liquid market. You can turn these over, if you need cash, you can get rid of commercial paper, or if you need cash you could issue some paper."
But, Johnston said, the money has not been flowing.
"That market has basically come to a halt in the last few weeks," he said.
That's where the federal reserve is stepping in. And Johnston says the move marks a big departure from the Fed's historic stance against unsecured commercial lending.
"They're going to accept this stuff that doesn't have any collateral at all," he said. "They're basically going to make short term loans to businesses without any collateral."
Johnston says traditionally, it's mostly investment banks -- and not commercial banks -- that are involved in buying the unsecured commercial paper.
Art Rolnick, the director of research at the Federal Reserve Bank of Minneapolis, said the kind of institutions that will be affected by the Fed's move will likely not be local.
"Regionally, the upper Midwest, Minnesota in particular, I think we're doing better on those grounds," Rolnick said. "I wouldn't be able to point to credit markets here that are having significant problems. Our financial institutions seem to be in pretty good shape. This is more a national and international issue rather than a local issue."
But several experts say that the any improvement in one portion of the credit markets has a trickle down effect and can help regionally.
That's something that Scott Lambert, executive vice president of the Minnesota Auto Dealers Association hopes will be the case.
"There's got to be ready credit available," Lambert said. "We are a seasonal business, some months are better than others, and we have to be able to weather the drier months."
Lambert says car dealers have been getting hit on both sides of the credit crunch. He said the tightening of consumer lines of credit -- or even just the perception of its tightness -- has steered consumers away from car purchases.
On top of that, dealers have had a harder time accessing short-term credit to buy cars from auto makers and keep inventory on the car lots. Lambert said keeping funds flowing to pay for inventory has been tough for dealers lately.
While Lambert said he's mostly in favor of any government fixes so far, and hopes the latest one will trickle down to car dealers in some fashion, he says at some point he thinks the interventions have to stop.
The Dow Jones industrials fell more than 500 points Tuesday on growing concerns about the financial sector, despite the government's move to buy commercial paper. Lambert thinks the government eventually will have to step back.
"I think at some point, the federal government making all these brash moves is counterproductive, because it looks like we're lurching from crisis to crisis, and that's not really a very calming factor," he said.
Rolnick said the Fed doesn't worry about why the market is up or down on a given day or week, but is focused more on the long term.