'Credit Crisis' Hits Everyone

Recent 'Credit Crisis' Hits Everyone: Companies and individuals are suffering. For individuals, the credit markets matter on several levels. Many investors, especially those close to retirement or in retirement, hold credit investments, usually in the form of Treasuries, corporate bonds or bond mutual funds. Treasuries are considered extremely safe, while corporate bonds range from pretty safe to frighteningly risky. Many corporate takeovers during the past several years were funded with borrowed money in the form of "junk" bonds. These corporate bonds sport a high yield but also a high risk of default.

Beyond investments, credit markets are essential to the economy. For instance, banks use credit markets to fund their day-to-day activities. The rates banks charge one another to borrow money for short-term needs have risen sharply, an indication that banks don't trust one another.

That translates into less money available for banks to lend to individuals or businesses, putting a squeeze on economic activity.

The most widely used bank-to-bank lending rate, the London interbank offered rate (Libor), which has risen sharply, is also used to calculate interest rates on credit cards and many adjustable-rate mortgages. That's more bad news that consumers and homeowners don't need.

Commercial-Paper Crunch

In another nook of the credit markets, banks and businesses actively use "commercial paper" to fund day-to-day business activities. Commercial paper represents short-term loans, sometimes as short as a day, and money-market mutual funds invest in this paper. But the credit crunch has even forced this usually routine market into crisis.

Some blue-chip companies report difficulty selling commercial paper, which means finding more expensive alternatives to fund business operations. Also, money-market funds, which historically are very safe, have gotten caught up in the commercial-paper crunch, with at least one fund seeing its price fall below the $1-a-share money funds almost always maintain. The government recently introduced an insurance program to backstop money funds.

A big part of the government bailout effort is aimed at restoring confidence in the credit markets by creating a "buyer of last resort," especially for the toxic credit derivatives that have heavily damaged the financial sector. Until the credit markets rebound, pressure on the economy will mount.