Right now I’m doing a little research on borrowing: whether personal borrowing is going up, down, or staying the same, and whether the velocities of those things have changed, whether corporate borrowing is going up, down, or staying the same, and whether the velocities of those have changed. I recall a paper produced by the Minneapolis Federal Reserve that showed that, at least as of the 3rd quarter of last year, there was no “credit crunch”. I haven’t been able to find an update of that paper. I’ve run into some anecdotal reports but not a great deal else. I’m finding this data devilishly difficult to ferret out.
However, just as a thought experiment let’s assume that there has been a substantial drying up of credit and both individuals and businesses are having a lot harder time borrowing money than they did, say, in 2006. What are the implications of that?
I’m more concerned with the implications for businesses of substantially less credit than there used to. Obviously, the financial sector will be greatly affected. I’d guess we’ll be able to get by with a significantly smaller financial sector than we had in 2006. I’d think that compensation in the financial sector would go down and any push effect that had on wages outside the sector would decrease, too.
I think it’s reasonable to believe that retail sales may be slowed for the foreseeable future since, based on our assumption, to the degree that stuff that was being sold was being bought with borrowed money not so much will be bought. Effective prices have risen.
I think there may be some other implications as well. For example, over the period of the last 25 years or so there’s been a lot of company-building via acquisition. To the extent that such acquisition was leveraged, i.e. done with borrowed money, presumably there will be less of that. And entities saddled with such debt will have greater difficulty in refinancing which I would assume would weaken them.
Will we see a lot of companies selling off these weakened pieces? Will companies be smaller? Will that have a depressing effect on executive pay?
It’s a lot to think about.
I’m soliciting ideas here. What will happen to businesses if the cost of borrowing gets high and stays high?
This will be a difficult analysis. I think you are just beginning to scratch the surface of the complexities. We collectively use phrases like “tight credit” too loosely. Pardon the pun. It is more complex.
Think about various credit scenarios:
Young family wants to buy starter home. Good credit history. Credit unavailable – bad. But I bet it will be available.
Family wants home equity loan to buy TV’s, vacations etc. Not so good, and not so available. Result: retailers going down.
Investor wants to leverage investments in strip malls. In current market he can’t get credit. Who cares? We have too much vacancy as it is.
Credit card companies raise rates or issue fewer cards. I’m not worried. People can pay cash. But it means less accrual of debt. Retailers go down. In the long run, who cares?
LBO shops – yours truly – find credit more expensive and less available. Offering prices to owners go down. Some take it, some don’t. Result: fewer deals; I think the economy is less well off, but certainly no earth shattering event.
Large corporations can’t find credit. I don’t think this is real. Large corporations can find credit.
Middle market corporations can’t find credit. Ahhhh. This is a problem. I suspect they can get working capital lines for inventory etc. But acquisitions, expansion etc. Not so much. This will retard growth and employment.
And so it goes.
But you know I have to make it political……
Everything I just cited pales in comparison to the policy environment right now. We were talking about credit decisions at the margin for various entities. But think about this: forget marginal credit, do you make an investment in a union shop given Chrysler? We’ve talked about it in our shop. Answer: No. Banks? Secured loans?? I suspect they are much more circumspect.
And what about the general tax and anti-capitalist environment Obama has created? Is this the haven for risk taking? Do you start up? Expand? Acquire and grow? Why? That means more people……..with govt mandated benefits? What new regulation will come down the line? Capital at risk?? What will be the after tax return to your investment after Team Obama gets through with this economy and tax policy? Can you say uncertainty? Can you say turtles going into a shell??
The left just simply never gets this. Rich people are already rich. They do not have to take additional risks and work hard to expand and get even richer. The wanna be rich do. But if the environment, or the risk taking equation sours..neither group will. So for those reliant on capital risk takers – that is, Average Joes – for their employment Obama’s policies are the absolute antithesis of what they should be cheerleading for. It is sad to watch class envy win out over growth policies and the interests of the little guy.
Of course this debate is not new. Abe Lincoln, who Obama seems to fancy himself after, was a far wiser man. He observed “you cannot help the poor by harming the rich.”
Of course I was never so foolish as to see Obama as Lincoln. Maybe Charlie Gibson does….