Getting It Exactly Backwards
The mechanism for this recession seems pretty clear: A bursting asset bubble has left both lenders and consumers over-leveraged, so everyone is trying to reduce their debt. This means less consumer spending for a while, as well as tighter lending.
Running a small business over the last few months, I have found that the credit we need to expand is not unavailable, but is harder to get. Banks and individual investors are asking for tougher terms, more collateral, and are being pickier about what they will fund. All totally normal and unsurprising (though stressful if you are in the middle of it).
The one thing small borrowers like myself have in our favor: Eventually, lenders have to lend and investors have to invest. They simply cannot just put all their money in the vault or the mattress. The money they hold, in deposits and CD’s and whatever else, has a cost, as do their operations staff. These costs have to be covered. The only way they have of doing so (short of switching businesses) is to put their free cash to work. They have to lend it and invest it. It’s a useful thing to remember in this world dominated by the cult of victimization and helplessness — that even as a borrower, you have power. Banks need you as much as you need them.
So, what does the government do now? Well, very soon, the Obama administration is going to be marketing to banks and investors an additional trillion dollars of government bonds backed by the full faith and credit of the US taxpayer as an alternative investment to funding my business. Uh, yeah, that’s sure going to help. On Thursday, I had some power with investors. Given time, they were going to have to consider my business as a place to put their money to work. Now, however, everyone can run out and park their money in a trillion dollars of new government securities that have features attached I can never match (e.g. the ability to print money or grab it at gunpoint to repay the loans).
But don’t worry about me, I will figure it all out. I just will not grow the business or hire as many people as I thought I could given new investment capital. But everything will be fine for the country as a whole as long as you believe that Nancy Pelosi and Barack Obama, with their vast business experience, will invest this trillion dollars more productively than I, and other like me, would have.
