Get ready for mass business failures!
October 8, 2008
Over the past couple of days I have become aware of a little reported on problem for small businesses here in the Dallas area: freezing of credit facilities. More and more companies are receiving calls from their bankers like this, “Hi Bob, this is Mark over at Bank of America…, no, no, Bob, we are not pulling your line of credit, but you may not be able to draw down on it right now.“ Of course, for the small business that relies on a credit facility, this may mean he can’t pay his employees or his vendors. Maybe Bob has enough to pay his employees, but calls his vendors and suggests he can’t pay his bill this month. In turn the vendor, who isn’t going to get paid by Bob, received a call from his banker freezing his line of credit is hit twice as hard. You can bet he won’t make payroll. This ’snowball’ effect is going to result in mass business failures. Get it? Banks aren’t even lending to each other, much less small, under capitalized businesses. Get ready for the worst, I fear it is coming.
Who is to blame? We are - i.e. you and me. We borrow too much! 43% of us spend more money each year than we make! First, we all spent too much money on houses, cars and consumer goods that we can’t afford. In the 1970s the average size home was 1,400 square feet, today the average is over 2,300 square feet. Are we that much bigger? Today we MUST have a phone, DSL connection, cell phone (maybe two), TIVO, cable TV and so on. All those services come with a monthly recurring cost - a cost we can’t really afford. We are a mess. Of course, lots of us are trying to blame Congress or Wall Street. Sure blame away, but at the end of the day the buck stops with you and me.
The most obvious problem we are facing today, was that to keep our economy growing, we asked people who could not afford to buy homes to do it anyway. We set up Freddie Mac and Fannie Mae and passed legislation forcing these two companies to loan money to people who could NEVER hope to afford to pay it back. To stay on the good side of Congress, Freddie Mac committed the largest election fraud in history and in 2006 the Federal Election Commission fined the company $3.6 million for illegal campaign contributions to Barney Frank and other members of the House Committee on Financial Services . To add insult to injury Congress passed the Commodity Futures Modernization Act of 2000 that created the so-called ‘credit default swap‘ (the instrument that has destroyed our banking system). Signed into law by Bill Clinton and introduced by a bi-partisan group of Republicans and Democrats, the bill was NEVER debated on the floor. Congress didn’t spend a minute discussing the bill. They didn’t hold a single hearing. Of course, Congress isn’t to blame, instead it is us. We keep electing the same people over and over and when we get the same results we are susprised. Biden has been in Congress as long as I have been alive and McCain isn’t far behind.
On a side note, Mark Cuban is going long, sort of…
