01 October 2008

One Answer

In my previous post, I asked why, if credit markets are supposedly frozen, I'm still getting so many offers for new credit cards and credit lines.

After emailing that same question to someone I know, who has worked extensively in mergers/acquisitions and other credit-intensive fields, he explained that marketing efforts often continue despite what may be happening in other departments of a financial institution. The idea is to keep bringing prospects through the door, and to decide later whether those prospects ought to be granted credit. And those prospects can always be sold to another firm if need be. (Thank you, Danby, for posting a similar comment on my original post.)

But my email correspondent added something else, that I found more troubling:

Lastly, this crisis is not overblown at all. If congress doesn't do anything, we will most likely go into a depression that many think will be worse than the Great Depression. Our world revolves on credit to a ridiculous extreme, moreso than most people can even possibly fathom. When credit stops, so does the economy.

A lot of Investment Bankers used to joke about how the whole economy was a house of cards supported by debt markets that would stop if banks decided to stop lending. The response of economists was that this would never happen because there is too much money to be made in lending. Well, it could be upon us and it will get ugly.

I'm not sure I agree with the premise that the current crisis extends beyond investment banks; I think some of these folks may be deliberately freezing interbank lending as a means of forcing Congress to act (a big game of "financial chicken"). But my larger question is this: if the current economy truly is a house of cards, supported by debt markets (a premise I do not dispute, by the way), is that an economic structure we really want to continue propping up? How many hundreds of billions of tax dollar interventions will that prop-up require? All to continue living in a house of cards?

I'm not saying I want to blow down the house of cards, start another Great Depression, make everybody do penance, and hope we all learn the value of thrift. I'm asking why we don't seize this opportunity to restructure our economy and our lifestyles in a way that doesn't require a sea of debt markets to keep us afloat?

I love my credit cards; they're an incredible convenience. I use them to pay for nearly everything, meaning I don't need to carry cash (which can be lost or stolen). And I can write a single check each month. But here's the key: I write that check. And I write it for the full amount. We never carry a balance. But as George Will points out in his brilliant piece today, far too many Americans have been thinking they can budget like the government does: constantly carrying a balance, and "hitching outlays to appetites."

In running my own business, I don't depend on "commercial paper." When a client hires me to conduct a public opinion survey, my only real cost is to hire a fieldhouse to make the phone calls and tabulate the results. I have one fieldhouse I send almost all my projects to, and we have developed a solid relationship of trust. The moment I get paid, they get paid. And they have the cash reserves to live with that. Likewise, for me, I know my clients and trust they will pay when I deliver their results. If it's a new client, or someone I'm not yet comfortable with, I ask for a chunk of the total once the interviewing begins. That way, even if I get shafted for the balance (which, BTW, has never happened), I can still pay my fieldhouse. I'd rather starve than shaft the company that collects my data. Again, it's a matter of maintaining cash reserves and not depending on "commercial paper" to keep me afloat. And it's also a matter of trust --- knowing and evaluating the people you're doing business with, and making judgments about who you will grant your own informal short-term credit to. I have clients who are notorious late-payers. But I continue doing analysis work for them, because my only "expense" is my own time --- and I've known them for many years, and they have never failed to pay. Trust.

The Yeoman Farmer wonders if we'd all be better off in the long run if the current house of cards does fall down, and we can rebuild the system on a foundation of saving and thrift --- and personal relationships, and trust, and cash reserves. But have we gotten ourselves into a situation where such a transition is impossible without massive dislocations for massive numbers of good families and businesses who have acted in good will?

Back in Illinois, we had many neighbors who'd lived through the Great Depression and could still tell vivid tales describing what it was like. I couldn't imagine making a deliberate choice to put my family through that. But I pray that if our nation does undergo some kind of massive dislocation, the transition is swift and the ultimate resolution is truly beneficial to us all.

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