Money The Credit Crunch Starts Hurting Us
posted by October 6 at 13:14 PMon
Companies cannot borrow:
Some small companies say they are no longer able to get loans from newly cautious banks as credit tightens across the country, and even those who do qualify are increasingly reluctant to borrow and expand, fearful of overextending themselves in the midst of the financial crisis.
State governments cannot borrow:
Massachusetts State Treasurer Timothy P. Cahill this week approached the U.S. Treasury and the Federal Reserve Bank of Boston about lending Massachusetts money under the same extraordinary terms the government is giving banks and Wall Street firms during this financial crisis, The Boston Globe reported.
The request was prompted by the stateís inability to borrow from the short-term debt markets because the financial turmoil has essentially caused credit markets to stop lending or charge prohibitive rates, The Globe said.
Earlier this week, Mr. Cahillís office shelved a $750 million debt offering because there were no buyers for state or municipal debt, he said. He did not say how much the state might want to borrow from the Fed.
Massachusettsí need is not as urgent, Mr. Cahill told The Globe, as the state of Californiaís, which requested similar federal assistance on Thursday. California officials said the state would run out of money by the end of the month if the short-term debt markets do not ease, and if it could not obtain loans from the Fed.
The state of California needing an emergency loan of $7 billion dollars from the Federal treasury, to just meet its short term obligations, tells you how frozen solid the credit markets have become.
This is how the irresponsibility of Wall Street will ultimately undo us all: Not by scouring our tax dollars but by collapsing profitable companies—companies that actually do things, that have an actual social value—and by collapsing the state governments that provide the meaningful services that make our lives possible.
The bailout package passed last week, if I understand it, was intended to prevent exactly this. By taking away the most toxic of the debt held by banks and directly pumping cash into their coffers, it was hoped that lending by these banks would resume.
Most of us aren’t really directly impacted by the Dow trading below 10,000 points today. If this sort of short term lending doesn’t restart very shortly, even those of us without massive investment portfolios will start to feel a sharp bit of pain from this panic.
By the nature of things like Net 30 payment terms,we’ve had a grace period. As we’re hitting about a month away from the collapse of Lehman Brothers and the start of this panic, things could start getting very ugly for people living paycheck-to-paycheck and businesses that must wait for a while before receiving payment for their work.
An example, by which I’ll try to explain why. Let’s say we’re a company that does laundry for hotels around town, on Net 30 terms. In other words, our customers have thirty days to pay us for the work we’ve done for them.
But, we have to pay our worker’s paychecks every week. So, while waiting the thirty days for our customers to pay us, we might borrow money for a few weeks to fund the paychecks. No big deal. When the customers pay, we pay back the loan.
These are the sort of loans, short term and low risk, are apparently drying up as banks panic and hoard cash for themselves rather than lending it out. Companies, even profitable companies that have reliably met their financial obligations, are now having to resort to usurers (demanding 30% interest rates before lending) in order to finance their basic operations. Companies perceived as being on shakier ground might not be able to borrow at all.
To understand how ugly this all can get, the customers in this example (the hotels) also rely upon short term lending to pay their costs (while waiting the thirty days for vacationers’ credit card companies to pay them.) If they can’t get a short term loan, we won’t get paid. If we don’t get paid, our employees won’t get paid. Add in the fact that state governments can’t borrow either, and thus run the risk of defaulting and failing to pay out state payrolls.
Extrapolate this over the complex web of payments and short-term loans that make our economy function, and you can see how the whole teetering tower can collapse.