Today's AdvertisingAge reports that Bank of America is slowing lending to McDonalds franchises, preventing them from making capital investments. Evidently Bank of America is moving to preserve its own capital base given uncertainty in the markets.
Now consider the impact on Main Street:
- McDonalds will not hire companies to fabricate coffee bars until later, reducing the need for fabricator jobs
- Local franchises will not hire builders to assemble and install those coffee bars, reducing revenue for local builders
- McDonalds will not staff those coffee bars (I am assuming they need additional people for that if they open additional service spaces), reducing staffing at McDonalds
- Revenues for the franchise will be lower (assuming the coffee bars will be successful), preventing additional investment in growth in the future
- Tax revenue will be lower in local communities, impacting state and local budgets
I don't write this to support the proposed $700B bail-out plan. I have not read it in detail this morning and lack the financial background to evaluate it against other alternatives. After reading the AdvertisingAge story, however, I thought it worth calling-out this example of how small enterprises and jobs may be affected around the country, as lenders preserve capital to shore-up their balance sheets in the growing credit crisis.
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Comments: 67
I don't know if anyone else noticed this, but lots of little folks have already lost their jobs due to corporate shutdowns way before this crisis. I think we'd be better off starting from scratch and getting back to basics, than going back to the same failed mess. I don't need a loan, that's not my mindset. You know what they say about paybacks...... the wealthy are reaping what they've sown on us - poverty.
No bail outs!!!!!
Like you, I haven't read the latest version, and I don't know the answer. I'm upset about the timing of the breakdown and the rush to a solution.
Aside from the financial impact of this crisis, which is unknown and a bit scary... I'm going to be most curious to see how our habits may have to shift in this country. The rising cost of gas has already changed some people's habits.
Change is definitely scary, especially when you don't know what it will bring. But I think our consumerism is really extreme in this country and a healthy balancing back towards more modest habits might be a nice change.
Above, though, I am speaking specifically to the impact of the credit crisis (a result of the mortgage downturn). This latest challenge is a particularly dramatic one because of how credit markets work. Consider this:
Step 1:
You have $1.
You deposit that $1 in a bank.
The bank keeps $0.10 and lends out $0.90 of your $1.
Step 2:
Person A borrows that $0.90 and deposits it in a bank
That bank keeps $0.09 and lends out $0.81
Step 3:
Person B borrows that $0.81 and deposits it in a bank
That bank keeps $0.08 and loans out $.73
Step 4:
Person C borrows that $0.73 and deposits it in a bank
That bank keeps $0.07 and loans out $0.66
Step 5:
Person D borrows that $0.66 and deposits it in a bank
That bank keeps $0.07 and loans out $0.59
(and this continues...)
The bank lending has allowed for economic growth or expansion.
You count your deposit of $1
Person A has deposits of $0.90
Person B has deposits of $0.81
Person C has deposits of $0.73
Person D has deposits of $0.66
The collective spending power created by your $ is $4.10 thanks to this cycle of lending. In ordinary times, that allows economic expansion as Persons A,B,C, and D can borrow money and spend that money on things like homes and cars. If these borrowers are companies, they can invest in new stores, production lines, or coffee bars.
When I describe the credit crunch, the real risk to the economy comes when banks quit lending money. If they start to worry that the companies, people, and other banks that they lend to will not pay them back, they become more conservative.
Instead of loaning out $0.90 of your $1 deposit, they might loan out just $0.50, or none of it at all. When that happens, Persons A, B, C, and D (or Companies A, B, C, and D) can't borrow money. Not surprisingly, that means they don't spend money. The result? What was $4.10 in spending power driving the economy (thanks to your original dollar and all that lending) becomes just $1.
That's what people mean when they say we are facing a credit crunch/credit crisis. They worry that the inability of businesses and consumers to borrow and invest will lead to collapsing consumption, shrinking our economy in big steps, quite suddenly.
Economists worry that this kind of credit failure could lead to significant job losses as businesses shrink or collapse. That would cause several cycles downward in employment and economic productivity. When we hear those voting on the bailout talking about "unimaginable consequences" or "not wanting to think about what might happen if we don't act," this is what they mean.
The goal of the rescue packages being considered is to give the banks confidence that debts will be repaid, so they continue to loan their money out. In short, they want the economic drive of your $1 saved to continue to be $4.10. Or at least that's how I understand it.
Do we have an economist in the house?
I wonder if Rome or other great civilizations of the past had their credit crises?
I hear the bill did not pass. Hopefully, that will give those of us who are not economists to learn more before the next one is presented.
Sandy, I heard the same thing. From what I understand, the vote is not final, however. Congressional leaders are able to do some arm twisting to turn the 11 votes necessary for passage. I imagine there is a lot of fascinating negotiation happening in D.C. right now.
smaller businesses have been facing these sorts of decisions about how to allocate resources for some time. I do think, though, that it's wise to recall that the actual resources of people, ideas, imagination, and physical resources are still strong, however challenging this current situation may be.
10 4 u
I suppose we could also follow Franklin Delano Roosevelt's lead and work to create a New New Deal. He combined industry regulation with federal investment in infrastructure. For that same $700B, we could fix a lot of bridges, update a lot of veterans' hospitals, or perhaps build a bullet train or two. But obviously FDR was working to bring the country out of a crisis with his plan rather than trying to avert one.
The challenge, I think, is that we have very little time to evaluate these alternatives or do real planning. The credit crisis is already here and growing. Clearly the markets are reacting as well. In 1929, the "money supply" (what I describe above in my long comment about bank deposits) shrank by about one third. Many attribute this to causing a four-year decline in GDP, where our GDP shrank 25%.
Paulson and Bernanke are trying to prevent this shrinking of the money supply (or the multiplier effect that I describe above when people save money in banks). Giving the money back to citizens or investing it in public works will likely take too long to have an effect. The reason they seek to support banks is to make sure that we don't pull our money out of them and they keep lending to one another. That protects the money supply and gives us additional time to address systemic problems in banking. At least, that's how I understand it.
That said, I'm glad that we have a central government that will prevent mass extinctions, in an economic (and human) sense.
We may not be able to,legally...but damn,it would make me feel better!
Main Street has been screwed for a long time. We started seeing it not too long after NAFTA was enacted. The powers that weren't never oversaw the terms of the agreement. It was supposed to be a two day. You export goods, I'll import them and I'll export good and you import them or pay a higher tariff on goods you send here.
Instead it's been a steady drip of you export, I import, I don't export goods, here's some jobs instead.
Main Street has been systematically stripped of the earning capacity that it once had. We've sold our soul to China and India and the rest of the world. We've borrowed for this war that serves the upper 1%.
Sorry , but if I have anything to say about it, bailout the guy next door losing his home before I see banks and speculators get one penny.
It's unpopular to say (and those running for office will never say it), but many individual homeowners also bear some of the blame. They got caught-up in the bubble mentality, thinking housing prices would never go down. They bought homes they knew they could not afford. They accepted loans that they did not understand to enable them to do so. This excess fed the same bubble that corporate greed drove from the top.
The hard question is where we go from here. The idea of having American taxpayers bail out the banks seems outrageous. Having those same Americans, most of whom did not overextend on their mortgages, bail out those that did overextend feels unjust as well.
But it's important to realize that, during the Great Depression, unemployment rates rose to 25%. Many families lost their entire savings. If anything of that magnitude happens here, many more people would be harmed by the downturn than benefited from the bubble. So while I am as frustrated and angry as others to be facing this situation, I think it's important to focus first on how best to avoid this result. And it may be a bitter pill to swallow, but we may need to help some of those that are responsible for getting us here, one way or another, if we want to get ourselves out.
if I can prove it,can we make someone else pay my $2300 share?
:-D
I don't mean it has to be painful for people that depended on these companies, but to those who ran the companies or practiced in shady business deals etc..
I wonder, though, if this would prevent the contraction of the money supply. If banks prefer not to lend capital rather than to raise it from the government, they will simply stop lending. That means that the money supply might contract even if the government assistance were there, simply because the incentives would be not to take that assistance.
It's an easier decision to decide to limit executive compensation for any banks that are bailed-out. I believe there is a provision to do this for exit packages (golden parachutes), but do not recall seeing a salary/incentives cap while and executive is working for a bailed-out firm. Some cap here might make sense as well if it's not in the current package.
Sorry. Nope. They've made too much money off our backs. There is a big difference between getting in over your head on a 100,000 dollar loan and losing millions and billions of other people money and walking away with millions for yourself.
The regular citizen first. If you look back Tom, most people lost their homes and their jobs.
Found it interesting that Ben Stein, McCain supporter, said that it would be a good idea to provide money for people to pay mortgages rather than fund Wall Street.
i'd go beat'em up in Washington if it did....
Thanks for your posts Tom. You did a great job explaining it to us!
Thats c ool you found a 10 dollar gold piece! I found over 20 silver quarters last week in an old piggy bank. I havn't checked yet, but I bet their worth more than 25 cents each.
Are we about to visit again the years following the Hoover debacle of the twenties where borrowing on Wall Street (unregulated of course) allowed stock prices to inflate into the stratosphere only to deflate as our housing market is doing today. And will our government respond in this election listening to thundering voices that we now need regulation of our banking industry, which John McCain in yesteryear championed but now suggests is necessary. Where was John before the banking industry's water broke and birthed a failed economy, oh I know, he was in one of his 14 automobiles driving to one of his nine houses. Just a fine example of a drunk in need of another drink.
Is the bailout intended to just let us keep on pretending, or is it supposed to help us readjust ? I'd rather live in a shack made out of wood than a mansion made out of cardboard.
Does America have the guts to live by it's real means and not on fantasy ?
You don't deposit your money in the bank in the first place if you don't trust the banker.
You don't buy stocks in s corporation if you think the CEO is a crook.
I think the root of the crisis we are in is a much more diffuse problem that has to do with the rampant criminalization of our corporate and government systems. Cronyism has never been more rampant as it has been in the bush administration.
Our government failed us in ways we had never seen before, fully exposed in the Katrina debacle.
Then we had Ken Lay, GWbushies best buddy, telling is employees at ENRON to continue to buy stock in the company, as it tanked, while a few years earlier they were creating their own mini energy crisis in California, with rolling blackouts that shot their earnings through the roof.
Then the endless, on going corruption in our own Justice Department with the dumbest guy in town Alberto Gonzales, running the show. (He is still under investigation BTW).
So I could go on and on and on and on...but this mess is systemic, beyond our financial system. The people have lost their elemental trust in their government. It is the equivalent of the pitchforks at the gates. The sentiment on Main Street, is bring the whole rotten mess down and let's begin again.
Where will we get the $700 Billion to give to the banks? The government is over $400 Billion in the red already this year. So it isn't as if we just had that money in the back of a vault somewhere. Won't our government have to BORROW that money? From whom will they borrow it? As I understand it, the rest of the world also now has a credit crisis with banks all over the world facing similar problems. And if the U.S. government does manage to borrow the money, won't that mean less money for other people / institutions to borrow?
Aren't we just rearranging the deck chairs on the Titanic? How does moving money from one computer account to another solve anything?
Do you have any idea what the interest rate will be on the $700 Billion in order to get people to loan that money to the Administration? What will we have to pay in interest?
After reading this morning's news, I see why you wrote this article. I've been told that economies are based on faith as much as on assets, but I never expected, in my lifetime, to see such a dramatic demonstration of this.
As I see it, not doing a bailout simply isn't an option. The financial system is the US in collapsing, and is starting to take with it the financial systems of other countries.
Bailing out huge profitable companies is a bitter pill to swallow, but the average American will suffer more from a collapsed economy than they will from the bailout plan.
I read this morning that the US Treasury is printing more money to help alleviate the crisis. I'm no economist, but surely this must be a tactic of last resort.
The concept of hording definitely crossed my mind. Not that I am going to begin hording, and I'm not sure what I would horde, certainly not useless paper money. Valuable metals like gold perhaps? Only problem is you can't eat gold. I concluded that the only thing I would horde would be seeds for planting edible food (maybe Amy's Organic soups, dried fruit and cliff bars too, some comfy sneakers, my acoustic guitar).
Another thought is if we weren't all bombarded by the media we would not even be aware of this "crisis" because it is still high level right now. The media definitely creates all of these emotions and escalates things a bit out of control.
I am not at all convinced that the proposed back-of-the-envelope plan, that emerged out of an all-nighter in the White House basement last week will actually accomplish the purpose it's intended to. (The only explanation I've heard for the rationale behind the $700 billion figure proposed is, "It's a really big number".)
This administration's credibility is hovering around the "lower than whale-shit" region. I, for one, am not at all thrilled at the prospect of becoming a part-owner of the Great American Garbage Debt Corporation.
You, Tom, say that you "lack the financial background to evaluate it against other alternatives. The problem here is that NO other alternatives have been considered or evaluted. We got railroaded into a devastating, unnecessary (and illegal) war by this administration and their "Chicken Little" predictions ("mushroom cloud"). I'm not interested in seeing that kind of scenario repeated, putting at risk as much as the Iraq war has/will cost us already.
This kind of money doesn't grow on trees, my friends. Sure, you can fire up the printing presses and churn it out. And you can look forward to the future Zimbabwe-ization of America too.
It's way past time that a more thougthful, deliberative approach to problems like this was taken. Rushing into such a monumental commitment is rash and irresponsible. The best financial minds in the country should be called in to confer and develop a variety of well thought-out options to present to the Congress. We cannot afford to risk the nation's future on one man's (Paulson's) bright idea.
"Bank of America said late Tuesday that it is not freezing any current or new lines of credit to McDonald's franchise owners, despite reports citing an internal memo from the fast-food giant advising franchisees of the contrary.
Bank spokesman Larry DiRita said the Charlotte-based bank will continue to honor its obligations to the company's franchise owners who are spending up to $100,000 to remodel and update each restaurant to accommodate the restaurant chain's plans to overhaul its drink options."
source
I remain unconvinced about the bailout, both the actual need and the usefulness of the proposal.
Like Di, I have been living within my means and am beyond annoyed with the rest of you! I did not take out a loan I knew I could not afford, only use plastic when I am buying online and have no choice, and in general have been telling the rest of my friends they were going to run into this wall for years. Why should I have to pay for other people's stupidity and greed?
The bailout is not the solution I want, but I am not prepared to see the whole country go down in flames either.
And fear not, there WILL be a whole lot of regulatin' going on in the near future--as a result of the outrage this entire descent into chaos has produced among the public.
Make no mistake--a great deal of damage has been done, and most of it cannot be undone. The economy, which has been teetering on the edge of recession for some time now, will undoubtedly stagnate for a prolonged period of time. There is NO assurance that this attempt to suffocate the raging forest fire of fear that is prevailing by dumping massive mountains of (your and my) money on it will be successful.
Paulson fails to consider other alternatives that may be less costly. Even more importantly, contrary to Paulson's claim, credit is not frozen, the US banking system is still lending significantly to the economy, as clearly demonstrated by the Fed's data, with bank credit still expanding at a high rate of 9% per year as of July 2008. Certainly, banks have become more prudent, matching the maturities of their assets and liabilities better, and are no longer replaying the speculative mania that led to the present subprime loan meltdown. There is so far little hard evidence of systemic risk to US commercial banks at large (note large investment banks have disappeared). Only speculative loans face problems. Loans invested in real and economic-generating activities in agriculture, industry and commerce remain sound. The non-financial sector continues to have access to credit at low interest rates.
This is NOT a $700 billion bailout. Globally there are $600 trillion in world liabilities, plus more than $400 trillion derivatives. We should let Wall Street fend for itself - and Congress should investigate the activities of the people behind this "bust out" of our treasury.
So the ball is in the Democrats' hands. The gun from Wall Street remains at their head. Before they make their next move, let me tell you what the media kept silent about while this bill was being debated:
1. The bailout bill had NO enforcement provisions for the so-called oversight group that was going to monitor Wall Street's spending of the $700 billion;
2. It had NO penalties, fines or imprisonment for any executive who might steal any of the people's money;
3. It did NOTHING to force banks and lenders to rewrite people's mortgages to avoid foreclosures -- this bill would not have stopped ONE foreclosure!;
4. It had NO teeth anywhere in the entire piece of legislation, using words like "suggested" when referring to the government being paid back for the bailout;
5. Over 200 economists wrote to Congress and said this bill might actually WORSEN the "financial crisis" and cause even MORE of a meltdown.
Put a fork in this slab of pork. It's over. Now it is time for our side to state very clearly the laws WE want passed. I will send you my proposals later today. We've bought ourselves less than 72 hours.
Yours,
Michael Moore
Michael also suggests listening to Dennis Kucinich's remarks
The threat of a "credit freeze" is nothing more than yet one more instance of the kind of panic-mongering this administration has made standard operating procedure. Banks are buisnesses too, and they are in the business of lending money. It's how they generate their income. They are not about to go dead in the water.
Can you imagine going to your local bakery and having this kind of conversation:
YOU: What's going on? Your display cases are empty?
BAKER: Yeah, I know. We heard that the economy's in trouble. We can't afford to bake a bunch of bread and cookies and cakes and pies when we're not sure anybody can afford to buy them, so we shut down the ovens.
YOU: But I have money. And I want some nice fresh bread for my family.
BAKER: Gee, sorry. Thanks for dropping by. Come back soon.
Banks that don't make loans are destined to go broke. They may tighten up credit, restrict their lending to their most reliable customers, charge higher interest rates, but, believe me, the entire economy is NOT going to come to a screeching halt, as some suggest, because the economic engine is out of lubricant (cash). Considering how egregiously credit has been abused in this country of late--by consumers as well as home-buyers and others--that may be a very good thing.
Buying up all the bad debt that a bunch of greedy, imprudent financiers loaded up with--letting them off the hook--and saddling the taxpayers with it is just plain nuts.
My wife was with here sister on a vacation trip 2 time zones away in our neighboring northern country of Canada, and happened to find out about the bad day on CNN and MSNBC via Suze Ormon's panicked diatribe of FEAR and DOOM ... scared my wife enough that she was ready to end her vacation for fear that her credit card would no longer work ...
The media has been attempting to scare us into supporting that or a similar bail-out (give-a-way) package ... when will we ever wake up ?
I don't support federal government bailouts because they amount to welfare, another form of socialism, something I can never support. I am a true blue capitalist.
Thank you for the article, explanation, all of it. Before saying the obvious -- time to fix the problem, I'll say that the problem has been around for a very long time, but greed prevailed.
It was explained to me back in the eighties just how the system was corrupt, and unless it was corrected it would eventually collapse. If it was seen so clearly then, it was known then, and if it was known then, there's no excuse for what has happened now, except the insatiable desire for money and power.
But that being said, that was then, this is now, and solutions are what are paramount.
I am in support of whatever it takes to get this country back on it's feet; what that means is
Main Street first.
Whatever crumbs are left, the others may have, or if the Citizenry decide -- as a collective people -- that they'll abide this bailout (so far they haven't), I'll buy into it, this time.
What a complete mess. I pity the next Administration, and its economic advisors who shall certainly devote their entire term cleaning up the mess that the Bush Administration made by not heeding the advice that Clinton offered.