I was thinking about lending and our financial system this week. I’m sure lots of others were, too. Wall Street banks have their bailout money in hand, or should have it in hand shortly. (There’s nothing like money with no strings attached is there? I’ve never experienced it, even when my grandparents would give me a $5 or $10 bill. Implicit in that gift was love, acceptance, approval and my desire to bask in it forever. Wall Street banks maybe aren’t burdened with that petty sentiment.)
And small, local, banks, have their money in hand, too. Though whose money it is and how they obtained it is different. No bailout with our tax dollars was needed. It’s money they earned the old-fashioned way: make good loans, take appropriate risks, help local businesses foster good credit, maintain clarity about lending vs gambling and our money as a result of our confidence in their management.
Wall Street banks announced recently they were reluctant to lend money until the economy strengthens. The irony of them telling us, the ones who rescued them, that we’re the ones not credit-worthy...seems to escape them.
Again, the ours they now claim as theirs is actually the ours that they needed..to stay in business. Of course, the ours they claimed as theirs in recent quarters was our economy.
On the local, rural, front, our community’s leaders recently sponsored a public meeting to discuss the affect of the financial crisis, the recession, the bailout, and its impact on our local economy. Attending it were representatives from some of the local banks. It was comforting to hear the local banks are solid, secure, well-capitalized and buffered to a large extent from the lending practices of their, our, bigger brothers: Wall Street banks. We all celebrated that they were smarter than say the leaders at Citi or Wachovia, WAMU or Bear Stearns..or Enron.
They acknowledged they see some affect locally of the recession we’ve been in since December 2007: slower payments and weaker cashflows with their clients. But still, it’s a small percentage of their overall portfolio.
Then they said that moving forward they would use more stringent lending practices. Basically, they’re tightening the local credit market.
What’s odd is that the lending practices that helped them avoid most of the impact of this recession for themselves and our community will now be discarded to avoid the impact of the recession.
One of the major contributors to the great Depression was the decision to implement trade barriers in the form of tariffs on thousands of imported good to be sold here in the US. This was the now infamous Smoot-Hawley Tariff Act of 1930. Naturally, other countries did the same. And the result, was, in seeking to protect their ‘local businesses’, political leaders brought global commerce to a halt in the ’30’s.
(That's a picture of Representative W.C. Hawley (left) and Senator Reed Smoot (right) ...in better days.)
Today, it's not political leaders bringing a halt to global trade, it's banking's leaders. Tightening credit on the national and global markets is today’s equivalent of that simple but devastating effect. It stops trade on the global markets as effectively as the Smoot-Hawley Act of 1930. That’s why you see the spread of this recession reaching the economies of every country around the world.
Tightening credit on the local market, on local small businesses, will have the same impact, maybe greater. Tightening credit on those businesses who have weathered the recession so far, whose good business practices have kept their company, their bank and their community strong...is no different.
The irony’s the same as with the big banks’ decisions to not lend.
It punishes the community. It tells them, us, our money’s no good now and we’re scared of you...you borrowers...we’re not sure you’re now worthy of our lending. Sure, you’ve done ok so far, but we can’t trust you’ll continue to lead your companies smartly. We're doing this to protect you...for your own good...now that you've helped us, the bank, stay strong.
And the impact on our economy will be more devastating if more small banks in more small towns whose primary business loans are to small business now restrict access to credit for those businesses who’ve survived to date.
Small business is what will drive us out of this recession. Cutting access to credit now for small business is what will drive us further into this recession.
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