For want of a nail, the shoe was lost;
For want of the shoe, the horse was lost;
For want of the horse, the rider was lost;
For want of the rider, the battle was lost;
For want of the battle, the kingdom was lost;
And all for the want of a horseshoe nail.
This morning as I was going out to walk Nola, our two and a half year old Samoyed bitch, I ran into my neighbor. Now this neighbor, a man just approaching fifty, is a building contractor and has been in the building trades all of his life as have his several brothers. Lately I’ve been making a point of asking people in the building trades how things were going as a sort of barometer and I asked my neighbor how his business was going.
He responded that it was really dead and that he was facing a specific problem today that served as a good illustration. He’s got a substantial job for which he must put up a performance bond, a form of insurance issued by an insurance company or bank that a job will be completed, not uncommon in the construction business. He’s having trouble getting anyone to issue one.
It’s not that he’s particularly risky or that the job is particularly risky or even that banks are willing to issue the bond, just not under the terms he’s accustomed to (I asked this question specifically). It’s that banks and insurance companies have very little appetite for risk and, where they probably underestimated risks in the past, they’re seeing high risk everywhere.
If my neighbor doesn’t secure his bond today, he loses the job. If he loses the job, all of the subcontractors he’d hire to execute the job will lose work, too. If he’s right and nobody is willing to issue performance bonds, it wouldn’t be surprising if the job doesn’t get done at all. If the job doesn’t get done at all, the people who would be hired by the restaurant he’s got a contract to build won’t be getting those jobs nor will the equipment suppliers and all of the other people involved in running a restaurant.
I suppose there’s more than one way of looking at this. It might be true that this is just a temporary situation and, once the shock has worn off, things will get back to normal, the appetite of banks and insurance companies for risk will increase, and the business activity that was supported by the willingness to take risks would come back again.
Or it may be true that we’ve been living with an unrealistically low perception of risk for some time that’s supported a similarly unrealistic level of economic activity. If that’s true, this may be the new normal and the coming times could be very hard, indeed.