An alternate solution to the credit crisis
The credit crisis is really starting to bite the economy in the behind.
Anyone who hasn't been in a coma the past three months cannot have avoided hearing something about it. The basic issue is that banks are less willing (in many cases, barely willing) to lend money, because the banks got burned so bad on their own balance sheets by the bursting of the housing bubble and all the "Troubled asset" problems relating to Mortgage Backed Equity, Collateralized Debt Obligations, Credit Default Swaps, and all the other fancy financial terms attached to that mode of wantonly reckless speculation.
So what's the big deal? People shouldn't be borrowing money to live outside their means anyway, right? Well, that's true.
But that's not why the credit crisis matters.
The credit crisis matters, and threatens to do unimaginable harm to the nation's economy, because small businesses cannot survive without credit.
Cashflow is the problem, and nearly every business regardless of what sector of the economy it is in, has it.
In short, expenses are constant. Income is irregular.
If I'm a small business owner, I have to do work for my clients today, I have to pay my employees today, but I probably won't get paid by my clients for at least two to three months after the work is finished. How am I supposed to make payroll and keep the lights on until then?
Since I don't have billions of dollars in the bank like Microsoft does, I rely on short-term loans from banks to cover my operating expenses until my clients pay up. That is, I live on credit.
But with banks freaking out like they are right now, and not loaning anything to anybody, businesses are having a really tough time right now making ends meet. A lot of them are in dire positions, on the brink of failure.
Not because their business model is bad, or their product/service is bad. Not because they're a bad company or poorly run.
But rather, because the banking system is having a collective seizure and is withholding the credit that lubricates the economy.
Ponder the following for a second, and you'll see the incredible risk posed by the credit crisis.
Nationalizing banks means that those banks could begin to lend again (or be forced to) without fear because they'd be backed by the federal government. It seems to be the going idea in financial circles these days as the way to fix the credit crisis.
Nobel Prize winning economist Jospeh Stiglitz wrote, in the Guardian last Friday:
And frankly, I think there's a lot of merit to the idea.
But, the Obama administration seems, to date, reluctant to do this.
I don't really understand why, but I gather his reluctance has something to do with keeping Wall Street bankers happy. Although why anyone should care about what they want anymore is beyond me.
Still, if Obama doesn't want to nationalize, there's something else he could do: He could ask the Congress to pass an emergency piece of legislation allowing the treasury itself to lend directly to small businesses.
If the banks won't give credit, let the treasury do it. And preferably on terms favorable to small businesses.
After all, private banks have a profit motive to satisfy. The treasury does not. Private banks have no stated obligation to fix the economy. The government does. So, hey, how about 0% business lines of credit for any business that needs one!
You want to stimulate the heck out of the economy in a real hurry? That would do it. That would give businesses the green light to pay their bills, knowing they won't have to drain their bank balances down to zero.
And, since most businesses owe money to other businesses, their ability to pay their own bills helps out their creditors' cashflow situations too, which has the pleasant effect of reducing the overall need for lines of credit.
It would help turn the vicious cycle that is the credit crisis into a virtuous cycle of a well functioning economy. Neat, eh?
If banks won't do what banks are supposed to do, then I think President Obama ought to put Timothy Geithner into the business of lending. Maybe that would wake the bankers up to the fact that their own fear is making them irrelevant to the economy at large, and impel them to start doing their job.
If so, great. But if not, at least the nation's small business owners won't be left twisting in the wind.
Anyone who hasn't been in a coma the past three months cannot have avoided hearing something about it. The basic issue is that banks are less willing (in many cases, barely willing) to lend money, because the banks got burned so bad on their own balance sheets by the bursting of the housing bubble and all the "Troubled asset" problems relating to Mortgage Backed Equity, Collateralized Debt Obligations, Credit Default Swaps, and all the other fancy financial terms attached to that mode of wantonly reckless speculation.
So what's the big deal? People shouldn't be borrowing money to live outside their means anyway, right? Well, that's true.
But that's not why the credit crisis matters.
The credit crisis matters, and threatens to do unimaginable harm to the nation's economy, because small businesses cannot survive without credit.
Cashflow is the problem, and nearly every business regardless of what sector of the economy it is in, has it.
In short, expenses are constant. Income is irregular.
If I'm a small business owner, I have to do work for my clients today, I have to pay my employees today, but I probably won't get paid by my clients for at least two to three months after the work is finished. How am I supposed to make payroll and keep the lights on until then?
Since I don't have billions of dollars in the bank like Microsoft does, I rely on short-term loans from banks to cover my operating expenses until my clients pay up. That is, I live on credit.
But with banks freaking out like they are right now, and not loaning anything to anybody, businesses are having a really tough time right now making ends meet. A lot of them are in dire positions, on the brink of failure.
Not because their business model is bad, or their product/service is bad. Not because they're a bad company or poorly run.
But rather, because the banking system is having a collective seizure and is withholding the credit that lubricates the economy.
Ponder the following for a second, and you'll see the incredible risk posed by the credit crisis.
- Small businesses represent over 99 percent of all employers in America.
- Small businesses are in real danger of getting killed because banks aren't lending.
Nationalizing banks means that those banks could begin to lend again (or be forced to) without fear because they'd be backed by the federal government. It seems to be the going idea in financial circles these days as the way to fix the credit crisis.
Nobel Prize winning economist Jospeh Stiglitz wrote, in the Guardian last Friday:
"Socialising losses while privatising gains is more worrisome than the consequences of nationalising banks."Even Alan Greenspan, the father of "Free Market Uber Alles" thinking, has said that we might just need to do this.
And frankly, I think there's a lot of merit to the idea.
But, the Obama administration seems, to date, reluctant to do this.
I don't really understand why, but I gather his reluctance has something to do with keeping Wall Street bankers happy. Although why anyone should care about what they want anymore is beyond me.
Still, if Obama doesn't want to nationalize, there's something else he could do: He could ask the Congress to pass an emergency piece of legislation allowing the treasury itself to lend directly to small businesses.
If the banks won't give credit, let the treasury do it. And preferably on terms favorable to small businesses.
After all, private banks have a profit motive to satisfy. The treasury does not. Private banks have no stated obligation to fix the economy. The government does. So, hey, how about 0% business lines of credit for any business that needs one!
You want to stimulate the heck out of the economy in a real hurry? That would do it. That would give businesses the green light to pay their bills, knowing they won't have to drain their bank balances down to zero.
And, since most businesses owe money to other businesses, their ability to pay their own bills helps out their creditors' cashflow situations too, which has the pleasant effect of reducing the overall need for lines of credit.
It would help turn the vicious cycle that is the credit crisis into a virtuous cycle of a well functioning economy. Neat, eh?
If banks won't do what banks are supposed to do, then I think President Obama ought to put Timothy Geithner into the business of lending. Maybe that would wake the bankers up to the fact that their own fear is making them irrelevant to the economy at large, and impel them to start doing their job.
If so, great. But if not, at least the nation's small business owners won't be left twisting in the wind.
# Posted by Jason Black : 12:13 PM
Comments:
The fundamental problem in this crisis begin with the miss-use of a noble prize winning formula. This linear equation was used by the finacial community to plot out certain linear investments so if any were to fail other segments of the equation would adjust to mitigate that failure. The problem was that they over leveraged these investments(all in the same industry) thus making any failure exponential instead of linear. It was like building an 80 story skyscraper on the concete foundation for a two story building.
The main question that should be asked and nobody has asked it and I mean nobody. Is this. How high were the returns on these instruments that made them so attractive to buyers? And how was that rate achievable
The solution to this mess is "print" than "trap" but what ever you do don't "borrow" the money. You "print" the money and lend it directly to the people in the form of a 33 year interest-free loans limited to $400,000. Let the "people" use the money first. The "people" would than pay-off their interest-burdened monthly debt: mortgage, credit cards, student and auto loans etc with these loans. By paying-off those debts the finacial institutions holding those debts would be re-capitalized. Two problems would be solved using the same dollar. This strategy allows that "printed" money to get into the economy quickly and in the most efficient and effective manner. Having rid themselves of the burden of interest and lowering principal payments by stretching out their payment schedules. The "people" will have lowered their monthly costs substantially. The "people" would now be in a position to save or spend the positive differential gained from this strategy. The banks, being recapitalized, would be in a position to start lending again and not have government as a partner.
The money has been "printed" and dispersed into the economy. Now,in order to prevent inflation, the money has to be "trapped". The first part of "trapping" the money is when the borrower repays the government that money gets removed from the economy. The second "trapping" is done by the financial institutions. As they have received a large influx of unexspected capital they would be restricted to lending only the amount which they would have received if their loans had been paying what was due.
The "trap", no matter how much was money "printed", keeps 97% of the "printed" money out of the economy at any given time. So there would only be a 3% affect on the economy whether it be inflation or devaluing.
The way the money is being delivered to the economy won't accomplish anything for the "people" or "business". Because, if the people don't have a piece of the pie then business will die!
Richard R. Bayside ny
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