A Wall Street type said to me today about this comment, "Wait until his employer needs to renegotiate the line of credit on his inventory of industrial equipment."

I'm not sure that people here in the real world are quite up to speed on what the credit crunch means for main street.

I was trading email last night with a friend who wonders if what's happening now is as bad as 1987. I said it's not as bad, if by not as bad you mean so much worse it's not worth the comparison.

We're a year into this thing, and feeling our way for the bottom -- hoping that we don't tumble over the cliff in the process. The financial industry as we've known it is gone. That's not hyperbole, that's fact -- just look at the bodies in the morgue.

I'm an optimist by nature. I believe in creative destruction. But the emphasis for the moment is on the destruction part of that formulation.

Comments

[Jeffrey Sykes]

I give this thread a +1 for elitist snark. Perhaps its Wall Street that is out of touch with Main Street.

Tell your banker friend I'll be standing down by the door.

FWIW, I don't think we keep it in inventory long enough to get a line of credit. UPS and the internet mean we sell it global from lil' ole Reidsville without leaving the warehouse.

Speaking of which, our warehouse guy left so if your banker friend needs a job ...

[Ed Cone]

Elitist snark? Spare me the chip on the shoulder, Jeff.

Maybe -- maybe -- you work for a company that operates without need of credit, but very few do. The point is that what's happening in the financial markets matters to most of us. That's true on main streets around the world.

FWIW, Mr. Wall Street grew up in that hotbed of snobbery known as Spencer, VA. He's worked hard and done well, but he's no more elitist than you are -- somewhat less self-pitying, though.

[mulerider24]

If I may inject a moment of unbiased neutrality, I would say you're both right. I work for one of these big Wall St. firms that is currently trying to corner the headline market. Yes, cash is king and capital is scarce. But I have also had no problems getting commercial financing for deals that would get a green light in any market.

Obviously the red light deals now have absolutely no chance of getting pushed through, even with personal guarantees and fat margin potential.

I think we are arguing about the yellow light deals on "Main St." This is where I agree with Ed. Underwriters who were previously interested in the "story" of a company and could be swayed into lending through other means outside of financials, now have gone back to the basics. The old saying about lending money to companies that don't need it is now strictly in play.

[Alex]

Yes, many small companies require credit but in my experience it's far more likely to be given by one's suppliers and other vendors than banks as most banks did not want to lend to small businesses in the first place without sba backing. I recently started my fifth business - a small cafe. I've never done food service before and given the current environment, this may not be my brightest idea, but I digress. We deal with quite a few large suppliers for our daily inventory and every single one of them has been willing to extend us terms over the last two months whereas three months earlier, they were not willing to do so. My clients in the software industry are saying the same thing. Of course, the banks are vitally important to our economy, but it will be interesting to see how credit evolves over the next year with other sources stepping into the void left by the bank meltdown. It may evolve that Main Street may not be so reliant on Wall Street as Wall Street might like to imagine...

[PrestoPundit]

You've got the wrong economist.

This is the inevitable re-coordination of the economy in the wake of a massive distortion of the time / value structure of the production economy, created by interest rates set well below the natural rate.

This ISN'T "creative destruction". Creative destruction has to do with innovation, NOT market corrections.

The economist who will help you understand what is going on right now it Friedrich Hayek, NOT Joseph Schumpeter.

A good introduction to Hayekian macro can be found in the article section of Roger Garrison's web site.

[sotosy1]

Actually, your quoting of Schumpeter may more appropriate than you may realize. One of his arguments with Fisher and the money supply gang is that the term money is a very loose concept: he pointed out that the capitalist system, if allowed, can create what are effectively monetary equivalents that cannot be controlled. The simplest example is trade credit. I don't know the current guestimates as to trade credit outstanding, but I am sure it is in the trillions.

While much of the great depression can be traced to the financial collapse triggered by the failure of Credit Anstalt, there was some evidence that a lot of damage to sectors outside of Finance was done by the tightening of terms of sale.

The "V" of "MV=PQ" varies with how you calculate "M". To some monetarists v is and uncontrollable variable; How realistic is this?

The creation of the conduits, CLO's and CDO's, actions of FNMA and FHLMC, etc. all created credit or liquidity: a form of value or money. Their destruction or incapacitation is described as creating a "liquidity shortfall. From another view what is happening is that the effective money supply is being dramatically reduced. This is where the crunch comes.

The Fed is giving loans: This is effectively new money as these loans are simply electronic credits to AIG's banks' fed funds accounts; may God help us if they try to immunize this new money by selling treasuries in the open market.

[The Snob]

What about the customer? If you're selling capital goods like machine tools then I'd bet some significant percentage of your clients are using credit to buy that machining center.

Also Wall Street has more than a little to do with the fact that all those overseas customers have lots of dollars floating around to spend on your gizmos and doohickeys.

I'm an entrepreneur who builds and sells an actual software product for actual cash to actual customers, bootstrapped five years running. I get the envy and wrath people feel for the I-bankers, hedge-fund pencilheads, private-equity pukes, et. al., but when the rich man in his mansion is going broke, odds are that the poor man at his gate is already dead and buried.

All that being said, I do think it would be appropriate for Lehman bonuses to get clawed back above a certain threshold for the past year or three. I don't mind a good salesman getting paid a good commission for a good deal but it's getting clear they started smoking a little too much of their own dope.

[Chuck Simmins]

Gotta say, leasing has been a mess for a while. Firms were all over the place on rates, with "incentives" to suppliers to use their leases for customers. GE is the BMOC and some of their rates ended up 2-3% after the supplier used their give-back to sweeten the deal to the customer.

[Michael Mace]

Rather than creative destruction, I think the operative word is "malinvestment," to borrow from the Austrian school.

[Jeffrey Sykes]

I don't have a chip on my shoulder, Edward, if I did I'd take my toys and go home and pout.

I had a lot more to say, but I'm gonna spare the thread because it's become quite interesting, far beyond my poor power to add or detract.

[bc]

If you are the only one not paying your vendors, they will cease doing business with you and you are screwed, but if everyone can't pay their vendors, credit will be extended. What choice do they have? Tell everyone to go away? We are a manufacturer of heavy equipment and our vendors have carried us for about the past nine months. We are paid up now, but this forbearance was amazing to me. These are not ordinary times.

[Thomas]

You guys are talking about stuff that's a bit up in the atmosphere for most folks. Back to Ed's Main Street...I know a lot of people with high school seniors at home (like me). We're all more than a little nervous about financing for college. That's the sort of thing that will bring the pain home for most of us.

[Ed Cone]

Jeff, sorry if I bit your head off, but I thought you were missing the point of the post by taking it personally, which was not its intent.

But it did turn into a very interesting conversation, so I guess we can both be happy about that.

[eric]

"The economist who will help you understand what is going on right now it Friedrich Hayek, NOT Joseph Schumpeter."

Well, if we're really going to look to dead Austrians, I'd suggest Hilferding.

[willis]

I believe in creative destruction as well. The discount brokers like e*trade have been chipping away at the retail side of the old-line brokerages for quite some time. Did anyone not think that it would never have an impact on their viability, at least in their original form?

[Agoraphobic Plumber]

"This ISN'T "creative destruction". Creative destruction has to do with innovation, NOT market corrections."

Like others in this thread, I'm just some Joe Schmo who can't claim any special knowledge of high finance or economic theory, but my understanding of the concept of "creative destruction" is that it would apply to market corrections. The businesses going down are the ones that made stupid decisions...enough so that they are now disappearing. That makes room for businesses that are more sane and better equipped to deal with the new environment. I have no idea, with the POSSIBLE exception of Fannie and Freddy (but they should ditch the political contributions and get back to their core business as a condition of the bailout, IMHO), why the government should bail ANY of them out.

It may want to take on some of their function TEMPORARILY until replacements come into play (like making necessary loans or insuring things or whatever), but why rescue them from themselves? That just distorts the perception of risk on the part of the other yahoo fat cats out there waiting to see what happens and making their plans for the next decade. I'd rather those guys know that they need to be careful, rather than knowing that if they take a chance and it goes bad that the government will just bail them out and they'll get their bonuses anyway.

But hey, I'm just a software developer working on main street. I'm still trying to figure out how Obama is mostly escaping scrutiny for being #2 on Fannie and Freddy's 20-year political payroll after 4 years in the senate, yet I know intimate details about Piper and Track. I obviously have absolutely NO idea how financial or political things work.

[Ed Cone]

This is not just a "market correction."

This is a dramatic remaking of the financial-services landscape -- big names gone for good, the structure of the industry changing, massive rethink of government's role, etc.

The old system was broken. I think a new one will emerge, work better, and eventually we'll find ways to break it, too.