There is a problem in America that is so large, so dangerous, and so imminent that it’s hard to really fathom for many people, and that problem is the current credit crisis that’s underway as I write this article. The average American does not know how drastic it can alter the way our economy operates, how much money is in your bank account, or if there will be banks to put your money into.

Talking with friends and family members and seeing the coverage on TV it seems like there is a large chasm dividing people on this topic. On the left there are those who know of the problem and of high finance and they are absolutely freaking out, and on the other is the average American who doesn’t know enough about the problem to properly freak out. The problem is that to properly explain what’s going on you need to teach a course in economics, and as much as that would be a great thing to do on prime time television one cannot interrupt America’s Got Talent or Heroes for mere triviality.

Now, I’m not one for reading into economics or government legislature but this particular story caught my eye because of it’s complexity, and it’s immediate impact on my life and the future of our country. I’m just your average Joe that has done some research and want to describe this in a way that will make you understand why this has happened and what it means for us.

Why this happened.

It’s being portrayed on the news that the problem arouse from the subprime mortgages going belly up. Now while it certainly does affect us economically when people can’t pay their mortgages and go default, but it was not the conduit to all the chaos. The culprit was the commercial paper market.

What is the commercial paper market?

Most people have never heard of the commercial paper market, and I didn’t until last week. The commercial paper market is a privately run market where gigantic corporations work directly with lenders and request huge sums of money with a set interest rate. Now you may ask yourself why a huge corporation needs to borrow money, don’t they have they’re own? Well to expand the company and to create revenue and cover large expenses that need to be covered to operate, a company has to have credit available at a moments notice. There are very few companies that do not participate in this practice. The lenders know of these companies and pretty much give them access to this at will, because even though there are no contracts they know that companies like McDonald’s and Google aren’t going anywhere anytime soon.

Now we’re talking a huge amount of money changing hands. And by huge I mean hundreds of billions of dollars a day. Yes, that’s a b. While these transactions are conducted on Wall Street but for the most part they are unaccounted for and are not reported because it’s essentially an huge IOU from a company to a lender. Now these lenders are banks, mutual fund managers, you name it.

So what went wrong?

Money market accounts are used as a safe haven for money. As you may know from having a 401k at your employment or talking with people about finance the money market accounts are known for they’re stability. Honestly they were glorified savings accounts. You don’t expect a huge return like you would investing in stocks or aggressive funds, but you knew your money was safe.

The reason why money markets were so safe is that they invested in the commercial paper market in companies that have been around for ages, some originating last century. And they knew that by investing this way they were guaranteed to be paid and share the small profit across the board.

The problem came when Lehman Brothers, one of the oldest and most prestigious investment firms could not cover losses on their mortgage assets. Now the lenders that were funding the commercial paper loans saw this as a bad sign cut down the amounts that were being given to Lehman Brothers and essentially compounded the problem and they were forced to go bankrupt.

Now enter our last player. The Reserve Fund.

The Reserve Fund was the first American money market fund created. It’s the gold standard when it comes to stability. Since money market’s invested heavily into commercial paper they were affected by the Lehman troubles and for the first time “Broke the Buck”, which means posted a loss on a money market fund. When wall street got wind of this everyone started pulling out of the paper market and all these great lines of credit froze. Companies could not get the money that they need to operate and start to break down, like what happened to Fannie Mae and Freddie Mack.

What’s the deal with the bailout.

The bailout gives 700 billion dollars (actually a little less with all the pork barrel) to Wall Street to give back some of the money lost and regain liquidity in the market. Now I haven’t read all 400+ pages of the bill, but there isn’t a guaranteed method to get the money back, and ultimately it’s taxpayer money that funded this.

If we do nothing then there would be a mass economic bankruptcy that would cripple the economy and end life as we know it. Foreign markets that rely on ours will fail and everything will be screwed. So the bailout is good, if it works. But the main problem that needs to be addressed is monitoring the commercial paper market so it’s public knowledge how much a company has out, who has it and make sure that this does not happen again.