The past few weeks have been breathtaking to watch. Turmoil in the financial markets have roiled, boiled and spilled over into the broader economy.
It would seem that until recently not even our politicians have understood how vital the credit markets and trust in the integrity of the US financial sector are to ours and the global economy.
When the Chinese government announced on the 24th of September that it instructed its banks not to make interbank loans to US banks I felt sure that this was only the first step in the world’s attempt to confine America’s economic woes to American Shores.
Our government and its citizens have become increasingly dependent on the availability and use of both short and long term credit to maintain the illusion of prosperity. The expansion of credit and the increasing indebtedness of US households began during the boom years of the Clinton Administration and accelerated during the comparatively weak Bush expansion.
Since the 1990’s Americans have moved from one bubble to the next, increasing their debt burdens and in so doing becoming the largest consumer market in the world. Manufacturing has left American shores leaving us with a service economy based on consumption and indebtedness to maintain levels of consumption. This necessarily means that the terms of our quality of life will be determined by those who manufacture and sell to us as we become increasingly dependent on imports while simultaneously exporting our money overseas into the coffers of our trading partners.
Now we face a crisis of confidence in our markets and our government must act. On the table was the proposal to inject liquidity into the financial services sector by buying assets.
The US government has the balance sheet and the time to hold these assets to determine which will perform. In all liklihood the American taxpayer will make money. This proposal is, therefore, a business decision rather than a bailout. The Paulson plan was a clean one entailing only the purchase of assets, we are now awaiting the compromise plan put together by congress.
I am a real estate investor and I know that I am far less likely to make another purchase, or otherwise allow a major capital outflow from my accounts, if for some reason one of my assets does not perform as planned.
This psychology is exactly what is going on on a massive scale on Wall Street. Because assets are not or may not perform as planned, financial institutions are hoarding the only asset they can be sure of, capital.
I have also had partners tell me recently that they reason that they continue to do business with me is because I am true to my word.
Sound business dealings are often based on integrity.
Integrity is lacking in the markets right now.
To the person on Main Street who doesn’t have a credit card the Paulson plan or any financial plan will look like a bailout of a “fat cat” at their expense. That is until that Main Street worker misses a paycheck because their employer cannot secure a bridge loan to make payroll.
Our financial system is simply too interconnected for our government not to act. And I am sure that if our government does not act, other nations will. I am a firm believer that it is better for us to implement our own solutions than have terms dictated to us by other nations.
I grow tired of pundits, economists, even Nobel Prize winning ones, whose knowledge is theoretical rather than practical and who have never run a business.
I believe that my greatest disappointment is the fact that our representatives in Washington have done a poor job connecting the dots for themselves and their constituents.