Reader Tim Allen writes:
I wanted you to consider that in a recent previous post you had
mentioned that people are filling up their gas tanks before they
previously would, and they are filling up all their other cars, and
spare gas tanks because of the fear of not having enough necessary gas.
This is a market reality and is completely rational considering the way
the game's rules are set up (no gouging, as per the govt).I would like you to consider that I, as a small business man,
maxed out all my lines of credit and deposited the money in my bank
accounts. If fear is driving this market, and if it causes banks to dry
up credit, I want to be the first to be tanked up on money,
so-to-speak. The negotiated rate of interest is not high enough for me
to be disinclined to borrow, at least until this credit storm blows
over. I know I am not the first person to have this idea and I won't be
the last, and we (together) will create the situation that you think
can't happen. The tighter credit gets, the more people will borrow, if
just to have the cash on hand, to not need to borrow in the future.
I have done the same thing. I am maxed on my line of credit, because the interest rate is low and I would rather have the money in hand and pay the interest rather than find out later my line is somehow revoked or frozen. The money is not needed for near term expenses, but I want to have resources in hand if the recession creates a business opportunity that requires funding. Does this worsen the near term crunch, the same way panic buying of gas worsens local gas shortages? Probably. And again, price is the key. Like with gas, I would rather rationing by price rather than shortage. In other words, I would rather my line of credit go up to a 15% interest rate, if that what it takes to put things in balance, than to be revoked entirely so a few businesses can still have 6% money.
I have never said that letting banks fail was without cost. I just think the cost is going to be there, one way or another, and the cheapest and quickest solution is to let the whole mess sort itself out.
By the way, the notion that small business lives on short term credit is a hoot. ExxonMobil may have access to the commercial paper market on short notice, but borrowing for our company, even in good times, generally takes a panzer division and a long war of attrition. Even layup deals have taken me 6 months or more to finance. Stephen Fairfax, via Mises, makes this point:
None of the small business owners I know depend upon easy credit to
make their payroll. When things get to the point where you need to
borrow to pay your employees, the end is near. Most small businesses
fail in the first few years, in large part because business is not
easy, it is hard. Not everyone is good at it. But it is an essential
part of free trade and the market economy that businesses fail, so that
new, better ones can arise in their place.
Few small businesses depend upon easy credit. Banks are generally
reluctant to lend to small businesses, with good reason. Most small
businesses are funded by owner's savings. Sometimes start-up money
comes from loans by parents or friends. While I can understand that
small businesses involved in building houses might profit from easy
credit, the market is sending unmistakable signals that there are too
many houses that are too expensive. Flooding the system with still more
easy credit can't be the cure, it is the problem.