Categories
economics

Riddle me this…

What are we improving with the bailout? The thing that “sold” the bailout package was the fear that credit would be hard to come by. Of course, banks are still lending, and if you have good credit, there are banks that will lend to you. Well, then we started to hear horror stories about not only large organizations failing because credit had been cut off, but smaller businesses too. I heard worries that companies wouldn’t be able to make payroll because of a credit crunch. Really? No, REALLY?

I’m really hoping that it isn’t a common business practice to use credit to cover regular operating coasts. I understand the need for credit, especially for buying inventory. A company buys things and then they have 30 days to pay for it. Thats a really short term form of credit, and it’s between two businesses, banks are not usually involved. Businesses can get loans based on outstanding bills, and I can understand that being cut off when there’s a credit crunch. But really, credit shouldn’t be used for regular things like payroll. I can only think of two reasons to do that.

1) Businesses really are strapped for cash and credit is what they need to grease the wheels.

2) Credit is so cheap that you might as well make use of it.

I’m guessing that #2 is the more likely. So here’s the question, do we really want to revert back to a point where credit was so cheap and easy that it is used as a matter of course? Wouldn’t we be better off if businesses were required to mostly operate out of cash flow? I’m still wondering what the long term consequences of this bill will be. I’m wondering if the old status quo (which is what we are trying to get back to) is what caused so many people to go into excessive debt and make so many businesses reliant on credit.

For example, I’ve been lead to believe that California is having trouble finding someone to give them loans. Here’s the thing, California has an enormous debt. before all of this stuff happened, they never considered the possibility of the state not being able to get a loan. Now that the credit markets have shrunk, they can’t borrow any more. Isn’t that a good thing? Under the old system, they were able to go further and further into debt, how is that better? My gut feeling (and this stuff is still too diffuse to go on anything other than gut feelings) is that propping up bad debt is going to lead to even more bad debt. We should take the hit, write off the bad debt, and start again with the more conservative credit system that is developing…

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