GreenRiver's  Instablog

I own a small business.  And I can tell you that it's impossible to get credit, for any reason, other than secured.

I've asked at several banks at several times, and the answer is always the same.  If you own your own building, they will loan money IF you pledge your property as collateral.  No unsecured credit.  Period.  For anyone, for any reason.  Anywhere.

I'm fortunate that I've been able to tap private investors on a couple of occasions.  Both have been repaid in full, with interest, and on time.  I think I'm good credit risk.  My business continues to grow, and I'm current on all accounts.

But why would a bank lend to me, when they can lend the the US Govornment at zero risk, earning anywhere from a pittance to 4% if they want to commit for that long.  The govornment just has to much collateral (the entire country) and their ability to repay their loan is unlimited is well (the printing press).

Imagine, though, in a parallel universe, one in which the govornment balanced it's books.  Gone would be the zero risk trade with the Treasury.  Investors could invest in companies directly (venture capitol, stocks or bonds), or indirectly by investing in banks.  In order to profit, the banks would be required to lend to qualified businesses and individuals - the people who are starting or expanding businesses and employment opportunities.

Massive govornment debt acts as a massive brake on the economy by diverting capital from potential job creation to the purchase of govornment debt.  The debt burden has reached the point that banks seem to have concluded that no business is likely to be able to meet its obligations in the long term.

And they might just be right.

Disclosure: No positions

It has always perplexed me that no income taxes are withheld from unemployment benefits.  I suppose that, since unemployment compensation is usually at a much lower rate than full employment earnings, and that as originally implemented the maximum benefit period was 13 weeks, it really didn't have too terrrible an effect on the recipients tax position. 

Unfortunately the duration of benefits has now been extended to as much as 99 weeks.   Imagine the consternation when people who haven't saved any of their benefits with which to pay their taxes.  They'll get socked with timely payment fees, late fees, interest and penalties.  They may end up owing a significant percentage of their total benefits in taxes and penalties;

Disclosure: No positions

Consumer credit has created a serious, mostly hidden problem for our economy.  We easily recognize that we have pulled demand forward via borrowing; we are now seeing the collapse of demand becuase we can't continue to borrow to pull demand to the present from further and further down the road.  We also know that consumer credit allows individuals to live beyond their means, but most people don't realize HOW far, and why it is the case.

Consider that when we borrow money and spend it in the current year, but repay it next year, that we're borrowing from next year's AFTER taxincome.  If your marginal tax rate is 40%, then for each dollar you borrow and spend in the current year beyond your net income, in order to unwind that debt next year you would need to either

a) earn an additional $3.33, in order to have $2 additional income after taxes -$1 to maintain your spending level, AND $1 to repay the funds borrowed the prior year

or

b) reduce spending next year by $2; thus eliminating the need to borrow $1 to fund expenditures beyond income and to have $1 left to repay the loan from current years.


What has happend as consumer credit has mushroomed in this country is that we have spent income from years down the road WITHOUT funding the tax liability associated with that future income.  When considered in those terms, the true size of the problem we will have with deleveraging becomes more obvious.

Disclosure: No positions