By Andrew L. Jaffee

There’s good news on the economic front which should help pull our great nation out of recession. Interest rates have been coming down, making it cheaper for individuals, small and mid-sized businesses, and large corporations to borrow money. The credit markets are loosening up, meaning that banks are getting less fearful about lending — especially after being burned by the mortgage meltdown — and are increasingly loaning money. Kudos for thawing of almost-frozen borrowing and lending activity goes squarely to the Bush administration and Federal Reserve’s economic stimulus (”bailout”) package. Lending and borrowing of cash plays an important role in our economy — when done wisely, that is. From CNNMoney.com:

As Bush administration officials defended the government’s response to the credit crisis Tuesday, there is one immediate and tangible result of their efforts: lower borrowing costs.

The Federal Reserve and Treasury Department have poured billions of dollars into banks in an attempt to increase liquidity [cash available in the economy] and encourage lending. The government has also unveiled other credit-boosting programs, including a purchasing program for short-term business debt and loans in exchanged for toxic assets as collateral [toxic = over-priced real estate].

As a result, lending rates have retreated from historical highs set last month when the credit crisis reached its peak. The 3-month Libor rate fell Tuesday to 2.22% from 2.24%, and the overnight Libor rate held steady at 0.4%, according to Bloomberg.com.

Libor, the London Interbank Offered Rate, is a daily average of interbank lending rates and a key barometer of liquidity in the credit market. More than $350 trillion in assets are tied to Libor. …

There are many examples of wise lending and borrowing. A young couple may buy a house at a reasonable price and a good interest rate, and assume monthly payments they can afford. If the couple picks a home on the margin of an up-and-coming inner city neighborhood, make improvements and renovations, and holds onto the property for ten years, they could end up with a house which appreciates substantially in value. The bank that loans the money to the couple assumes the entire risk for the value of the house (minus down payment), but is rewarded by earning steady monthly interest payments. It’s a win-win situation, as many young couples can’t just plunk down say $110,000 for a home, but are able to buy a home nonetheless, and the bank stays profitable from interest payments earned from loaning money to young couples.

Use of “commercial paper” is another example of sensible lending and borrowing, and a practice that most corporations have used for years and come to depend upon:

… Commercial paper (CP) is a short-term debt instrument issued by large banks and corporations with a maturity of one to 270 days.

Traditionally, companies use CP to finance day-to-day operations, borrowing cash they need to meet payroll or buy materials. Borrowing short-term money gives a company more flexibility to meet short-term needs, and is usually cheaper than issuing long-term debt. Companies can, and often do, roll over their CP as it matures, which effectively turns short-term debt into long-term debt, but at short-term interest rates. …

Companies using CP have more flexibility in running their businesses. They can, for example, use cash in the bank for investment in new technologies, hiring skilled employees, buying advertising, etc., all while maintaining or even accelerating their core operations. A company with temporarily low cash reserves, or dealing with a bad month, may use CP to get its house in order and maintain operations until it rebuilds sufficient funds to run on its revenues instead of borrowed money.

The current stimulus package being implemented by the Treasury Department and Federal Reserve includes support for the CP market, and that market is picking up — more good news.

Of course, there are plenty of examples of credit misuse. Many people either have themselves, or know someone who has gone on a spending spree with a credit card, and end up borrowing more money than they can ever hope to pay back. Another example of bad borrowing and lending is the recent mortgage meltdown, where home buyers overpaid for homes, and banks made too many risky loans.

In any event, the fact the credit (money) is becoming available again is a sign that people are becoming less fearful and more confident about spending. One of the most important aspects to economic systems is the emotional state of the people participating in that system. Once people regain confidence, business picks up. There are valid arguments against government intervention in economies, but sometimes nations have to take drastic measures to prevent their financial systems from collapsing.

Without the current economic stimulus package, our financial system probably would’ve collapsed. Millions of Americans would have ended up penniless and in the streets. One only need look at American history to realize that government intervention is absolutely necessary in cases like the recent mortgage mess.

After the stock market crash in 1929, our national government basically took a hands-off approach to dealing with the after-effects. The end-result was the Great Depression. In this year of 2008, we have a general consensus in government to intervene in our free markets to prevent a repeat of the extremely painful financial situation of the 1930s.