He that dies pays all debts.
-- William Shakespeare (1564 - 1616), "The Tempest", Act 3 scene 2
Few people have a handle on the real financial crisis that we are experiencing.
The trickle down from Wall Street’s implosion is talked about but not well attended. What is happening on Main Street and on Madison Avenue is the disappearance of credit. Few businesses can operate without credit. The uneven flow of stock to sell (whether it be lettuce or Chinese handbags) requires money to smooth out the wrinkles. Those wrinkles are the cost of electricity, garbage removal and last, but not least, salaries. We won’t mention taxes – which the government regularly demands – if you’re not yet dead.
The recipients of the TARP, arguably nothing more than a palliative, went to the banks. They kept the money after filling some holes in their balance sheets and the rest have gone for bonuses. We’ll never see any of that money. Dimon (JPMorganChase) got $17 million, Blankfein (Goldman Sachs) got $9 million -- if you believe the media – and a variety of top bankers got from $500,000 on up. All told, they gave out nearly $30 Billion to reward them for creating the morass.
Now, facing the next wave of this rolling disaster, commercial loans, the real problem is coming home to roost. Since there can be no “double-dip” according to Geithner, we have to punt. Along with the evaporation of the dollar’s value and the rolling implosion of foreign “sovereign” debt (that means that countries are defaulting on their loans), we have the commercial real estate and credit to small businesses going the way of dinosaurs.
When commercial loans default, it is usually due to the fact that business is drying up and the value of the mortgage loans is higher than the value of the property. With that comes the following: business failures, commercial foreclosures, and loss of jobs due to companies going out of business.
This doesn’t have to happen but it will happen. Why?
Because, small business loans were always a tenuous proposition. The SBA, for example, only gave loans to business owners who had collateral (usually in the form of real estate) to guarantee the payback. At this point, there are about 10 different reasons why that cannot work (credit scores, drop in value, foreclosures, reduced business, etc.). If SBA loans didn’t work before, they will be impossible now – unless the government stepped in to help. That will not happen despite the PR, which the administration will spread around.
We’re all in for a long and difficult recovery. But, it has not yet started. We are still heading into a nosedive.