A Question for the Business Types in the Audience

A question about borrowing.

July 18, 2011

Comments

It is staple of contemporary discourse to be reminded from time to time that some people are actually in business or, better yet, own a small business. This factoid is often deployed to demonstrate superior knowledge regarding economics, taxes, regulations, etc. We hear it all the time, for example, from politicians who have “met a payroll,” and so forth.

Ok, so here is a business-oriented question: if one owns a small business (or even a large one) and one is told that started a date certain within a few weeks that one will no longer be able to borrow money, what effect would that have on your ability to run your business? No loans to cover equipment, no ability to make short-term loans to cover payroll. No borrowing. Period.

What effect would that have on your business?

And how would this work if your business was one that relied on seasonality to make your yearly targets? What if you rely on summer tourism or Christmas sales? Or, perhaps, you grow plants and sell them wholesale to a network of local nurseries, with a very clearly defined planting and harvest season?*

At any rate: thoughts?

And I will state that there is a substantial difference between the federal government and a business and I am not a fan of analogizing the two. However, the basic issue of inability to borrow at all strikes me as analogous in basic terms.

I would remind everyone as well that during the early goings of the financial crisis that was part of the Great Recession was a credit crunch that had a rather significant effect on small businesses. I recall being told that without the ability to borrow that retailers could not stock shelves or meet payrolls. Was this incorrect?

____

*I cheat somewhat with the question, as I know the answer, having had a friend in said business.

73 responses to “A Question for the Business Types in the Audience”

anjin-san

July 18, 2011 at 10:00 pm

My father was a very successful businessman. I know of at least three times he had serious cash flow issues & had his back against the wall – but, he had excellent credit and a good relationship with his bankers, so he was always able to borrow money when he needed it. Take that away and he would have failed…
Liberty60

July 18, 2011 at 10:28 pm

By way of answer, a questionfor the lawr types out there-
What is the one universal answer to any legal question?

Answer: “IT DEPENDS”

Depending on the circumstances and facts of a particular case, almost any answer or outcome is possible.

Which is similar to business- business is a matter of management, and reacting to different circumstances that chane and evolve over time- questions like “Is it a good idea to borrow?” or “Is it a good idea to invest in new capital equipment?” are entirely a matter of the particular circumstances and facts.

This comes to mind because the modern conservative movement has established itself as the party of fixed rigid orthodoxy, filled with “pledges” of everything from taxes to marriage.

It sees the world in terms of fixed immutable notions, where it is ALWAYS wrong to run a debt, or NEVER acceptable to increase taxes, and frames these questions in moral, not managerial terms.

In business, it is always a matter of balancing one effect against another- raising prices on one hand, versus the likelihood of driving away customers on the other.

But conservatives today don’t look at it that way- in their mind, all tax cuts always raise revenue, all the time. Social welfare spending is wasteful and destructive- and military spending is productive, even stimulative.

There are a priori beliefs, not open to question or subject to changed circumstances.

I see where you are going with your question, Dr. Taylor, but you might have better results posing a question about transubstantiation of the Holy Spirit.
Tom M.

July 18, 2011 at 10:35 pm

I’m an economist by education and a banker by profession.

Your hypothetical suffers two fatal flaws, in my estimation. First, it ignores that business-creditor relationships are governed by contract law, which in 99% of cases stipulate a term for the extension of credit that can only be abbreviated by an event of default. Second, banks don’t revoke credit for sound borrowers.

Either way, such a situation could only occur if the borrower couldn’t demonstrate to it’s creditors that it couldn’t meet it’s obligations under the credit terms. That’s where the crux of the debate lies.
Steven Taylor

July 18, 2011 at 11:01 pm

@Tom M.: Of course, there is a reason I noted the analogy was problematic. I am not trying to construct an exact analogy.

But taking your point: no lender is refusing to lend to the feds. Indeed, the lenders are more than willing to continue to lend. The only potential impediment is self-imposed.
Ben Wolf

July 18, 2011 at 11:35 pm

@Steven Taylor: Banks are willing to loan money to the feds because the feds give banks money to lend back to them. This is one of the little ginormous secrets; we loan banks hundreds of billions of dollars to loan back to us at three percent interest. It’s win-win for the lender because they don’t risk their own capital.

As for your original question, not being able to borrow doesn’t mean squat for my current business. I’m fully capitalized and fund operations 100%.
Ben Wolf

July 19, 2011 at 12:08 am

What’s really bizarre is that the federal government borrows at all.

The government needs money for a program or project. It actually has two choices: it can issue a $1 bond and pay someone interest on it, or it can print a $1 bill. Both expand the money supply and both are backed by the full faith and credit of the federal government. Yet people have it in their heads that printing the bill is somehow more dangerously inflationary, which is completely untrue. So we keep printing bonds and transferring capital to investors rather than investing that money in the people.

I suppose we’ll keep arguing about a debt ceiling and borrowing that are completely unecessary; anything else would require unorthodox thinking.
Tom M.

July 19, 2011 at 12:09 am

Moodys isn’t threatening to downgrade USTs because of the debt ceiling, it’s threatening to downgrade USTs because, as a bond rating agency, it detects that the ability to service the current and projected debts are not sustainable.
Tlaloc

July 19, 2011 at 12:18 am

Moodys isn’t threatening to downgrade USTs because of the debt ceiling, it’s threatening to downgrade USTs because, as a bond rating agency, it detects that the ability to service the current and projected debts are not sustainable.

Yeah except for the part where they’ve explicitly said they will downgrade due to actual or technical default on obligations. In other words they’ve muttered about long term trends and debt to GDP ratios as a possible future issue but they’ve made it clear if the debt ceiling doesn’t go up before Aug 3 we’ll be less than AAA by September.
SteveP

July 19, 2011 at 1:30 am

When did it become accepted as the proper way to do business to operate on debt rather than capital?
I started on a shoestring and expand only when I have the capital to support the expansion. Growth has been slow but steady and my business is solid. It has taken some time and struggle but it supports a comfortable lifestyle with some modest luxuries. I don’t owe anybody anything and I’ve turned down several credit offers. If I have to borrow money to keep the doors open it means I’ve screwed up badly.
The “I want it all and I want it now ” get rich quick mentality that has infected business in this country is stupid.
Cutting up the government’s credit cards doesn’t automatically mean default any more than it does for an individual or business. Not being able to continue borrowing doesn’t prevent servicing existing debt. Government has the necessary revenue.
The opposition to placing a limit on the government’s borrowing is due to the fact that it will require government to stop expanding and actually shrink the government. The left worships government as god, believing that all good flows from it. Reducing its size, scope, power and intrusiveness is heresy.
anjin-san

July 19, 2011 at 2:10 am

Cutting up the government’s credit cards

Except the tea party types don’t want to cut up the credit cards, they want to cut up the bills for things already purchased.

If I have to borrow money to keep the doors open it means I’ve screwed up badly.
anjin-san

July 19, 2011 at 2:15 am

If I have to borrow money to keep the doors open it means I’ve screwed up badly.

If you think that only your own mistakes could lead to a circumstance where you might have to borrow to stay afloat, you have led a pretty sheltered life. There are some businessmen in Japan I could introduce you to if you want to take a look at the world beyond the end of your nose.

The left worships government as god, believing that all good flows from it.

Are you truly this simple minded? Alas, probably so…
Ben Wolf

July 19, 2011 at 3:39 am

The left worships government as god, believing that all good flows from it. Reducing its size, scope, power and intrusiveness is heresy.

Good to know you don’t buy into paranoid caracatures of people.
john personna

July 19, 2011 at 9:33 am

@SteveP:

When did it become accepted as the proper way to do business to operate on debt rather than capital?

There are a number of good charts on public and private debt here.

The key background to this whole story is the decades long accumulation of debt at all levels: personal, corporate, and governmental.

I happen to think that my politics map to that in a more consistent way than the typical business conservative who may know it at the back of his head but wants to “blame Obama” anyway.

You can’t blame a 3-year President for a 50 year trend.

Look at those charts. Over the last 50 years all types of credit have expanded, but consumer and corporate debt have expanded MORE than government debt.

… and now we have a debt-recession, with consumers and companies trying to deleverage.

Go figure.
PD Shaw

July 19, 2011 at 10:10 am

John P, that chart doesn’t have anything on small business debt; it has corporate debt.

Small business doesn’t have access to credit that the federal government (and large corporations) have. They can get a relatively small line of unsecured credit to meet a few weeks of payroll. But if they want to seriously borrow they are going to have to come up with security, such as the family home or retirement savings.
john personna

July 19, 2011 at 10:17 am

I don’t know why you are telling me that, PD. The first chart is called “U.S. Total Credit Market Debt as a % of GDP.”

Do you actually think small business can borrow without ending up in “Total Credit Market Debt?”
john personna

July 19, 2011 at 10:17 am

I also don’t know why your claim matters, to my bigger point, about the 50 year debt trend.
PD Shaw

July 19, 2011 at 10:19 am

The Prof. is asking a question about small business. You have no small business data. I am part owner of a small business. We can’t borrow like big business or big government.
john personna

July 19, 2011 at 10:21 am

I was leveraging off Steve P’s question, with what I think is really important data about the evolution of US credit markets.

If you just want to be thread police, stuff yourself.
john personna

July 19, 2011 at 10:23 am

(I’m afraid I don’t find the prof’s angle, relating government lending to small business lending, to be that interesting. I think the “U.S. Total Credit Market Debt as a % of GDP” is much more important, if you are trying to understand “debt in 2011.”)
Steven L. Taylor

July 19, 2011 at 10:54 am

@PD Shaw:

We can’t borrow like big business or big government.

That’s not the nature of the question, however: it i whether a total cessation to access of credit would be a problem or not.

Another example that came to mind this morning is a local builder who is an acquaintance of mine. He needs bank loans for individual building project. No loans, no construction. No construction and he has to lay off workers. If he were to find himself in an arbitrary position to be unable to borrow, that would be rather problematic.
Steven L. Taylor

July 19, 2011 at 10:55 am

@john personna: I concur that if what we are trying to diagnose overall economic problems, then looking at debt in a variety of ways is key.

That is not, however, the point I am trying to make.

The analogy is to the debt ceiling and telling the government, as of a date certain, that it can longer borrow.
john personna

July 19, 2011 at 11:06 am

@Steven L. Taylor:

The analogy is to the debt ceiling and telling the government, as of a date certain, that it can longer borrow.

Got that ;-), doesn’t really work for me.
SteveP

July 19, 2011 at 12:01 pm

@anjin-san:

Except the tea party types don’t want to cut up the credit cards, they want to cut up the bills for things already purchased.

Wrong. We want the government to stop enslaving future generations with debt. That means stop borrowing for present spending and pay down current debt.
Kitty_T

July 19, 2011 at 12:12 pm

I actually am a small business owner. (Should I proclaim myself an economic genius and run for congress, now?) Sorry this is so long –

1. On a day to day basis, no credit would royally screw up inventory flow in just about every way. (We sell physical stuff out of storefronts.) Currently, we place orders with most of our suppliers on net 30 terms. The simple logistics of changing to a COD system, when we are ordering thousands of SKUs weekly going to 5-6 different locations, would be daunting – you’d basically have to either have a check on hand for every delivery or an authorized signatory on the bank account hanging around at every location (which would NOT happen so I’d be driving my sorry behind around town a whole lot, and/or devoting a hell of a lot of time to tracking down final invoice amounts on short notice rather than, you know, actually running the business).

2. Purely on cash flows we could probably make the switch (assuming inventory already issued on net 30 terms didn’t immediately come due), but our inventory would decline significantly while we did it. We’d tick off a lot more customers by running out of stuff, which would be a big problem if our competitors didn’t have the same problem, either by not being credit constrained, or having greater resources (national chains, in particular). We’d probably jettison smaller/non key lines – we can’t cut down to the 20% of items that do 80% of volume, but we’d no longer have the luxury of having all the nice extras people like to see when they show up to buy their basics.

3. We’d have to stop extending credit to our customers (a minority of them get it, but they include some of our bigger customers) to help close the AR/payables gap. This couldn’t happen overnight, which would further constrain cash flows. If our competition was not similarly constrained, we’d be in a world of hurt. It could also have knock-on effects for our customers’ businesses, since we are a B2B supplier.

4. Other than net terms for inventory, we don’t really borrow other than for expansions (covering the several hundred K or so in up front build-out and inventory costs to open a new location, or saving for it, just isn’t in the operating budget). Obviously, that would stop. Excess cash reserves would be needed to cushion inventory fluctuations rather than expansion.

5. We’d probably shift to more part-time/contract workers for maximum staffing flexibility, and cut down on hours overall. We’d also probably take more liberal advantage of the fact that in this state you take no hit on UI for firing employees who aren’t with you at least 6 months – there would basically be no second chances to keep costs down.

6. Assuming this would take effect at some date in the future rather than right this second, I’d draw down our existing revolver 100% immediately.

7. Don’t ask me what we’d stop paying first if we got cash crunched. I’d really need to reserch where my biggest personal vulnerability would lie if it all goes south (probably employees, but I don’t really know), and covering my own behind would absolutely be the first priority. But without inventory to sell, everything else is moot, so our suppliers would be last.
Steven L. Taylor

July 19, 2011 at 12:23 pm

@Kitty_T: Thanks for the long reply. This was what I was getting at.
Jay Tea

July 19, 2011 at 12:28 pm

@anjin-san: Kindly show where a significant portion of the Tea Party movement has actually advocated repudiating existing debt. They’re more serious about that than you are — they are calling for notborrowing more and paying down what is owed, while your position seems to be to borrow more and more, and worry about paying it down… well, some day, I guess.

J.
David M

July 19, 2011 at 12:35 pm

Even if what Jay Tea asserts is correct, I’d argue the Tea Party are less serious because their actions will increase the interest cost on the existing debt. Rational people usually want to decrease the amount of interest they have to pay, not increase it.
Steven L. Taylor

July 19, 2011 at 12:35 pm

@Jay Tea: Anyone who advocates not raising the debt ceiling is not serious about the debt. This true at a minimum, because a downgrade in US bond ratings will make servicing the existing debt more expensive, and thereby exacerbate the existing debt problem.

That is pretty much rock solid fact.

Further, not raising the debt ceiling is likely to facilitate a new financial crisis, which will put further strain on the federal government and will exacerbate the debt problem. It will also hamper economic growth, which means less tax revenue and more debt.

It is actually extremely easy to demonstrate.
SteveP

July 19, 2011 at 12:35 pm

@anjin-san:

My beliefs about running a business are the result of hard experience looking at the world beyond my nose. My life has been far from sheltered; I know what it’s like to sleep under a bridge, bathe in a creek and wonder how where my next meal is coming from. Like most small business people I failed at several businesses before I got it right.
Having to borrow because you get in a bind is a lot different than operating on borrowed money as a normal way of doing business. However, getting in a bind in the first place means you screwed up somewhere along the line. Part of business planning is anticipating future trends and making provision for people not delivering on their promises, accidents, etc. Not getting it right is what gets you in a bind. No one can be perfect but that doesn’t take away the responsiblity for your decisions.
SteveP

July 19, 2011 at 12:55 pm

@Ben Wolf:

Good to know you don’t buy into paranoid caracatures of people.

I don’t. Some generalizations are true and a lifetime (56 years so far) of experience with leftists has shown me that one is.
When I started becoming politically aware I explored the collectivist ideologies, buying into them for a time. The first time I registered to vote I even registered as a Democrat and joined the party.
Then I grew up.
Jay Tea

July 19, 2011 at 12:57 pm

@Steven L. Taylor: My own position has been a temporary raise, coupled with a cut a year or so down the line, to give us a little “breathing room.”

But I would state that those who would advocate raising the debt ceiling without a concrete, realistic plan to bring it down — meaning, with serious teeth — is not serious about seeing that debt as a huge, pending problem that will only get worse and worse, the more we kick it down the road.

And, by “serious teeth,” I mean like my own proposal of jacking it up to, say, 16 trillion now, then shaving it back one trillion a year, starting on September 1, 2012. I am not that concerned with the particular numbers, but I stand on the concept — no deal now without some major back-end limitations.

J.
Steven L. Taylor

July 19, 2011 at 1:01 pm

@Jay Tea: As usual, you are dodging. You claim the that the Tea Party is extremely serious about the debt. I explained why they are not. Instead of dealing with that you provide your own plan and then make some new claims.
Jay Tea

July 19, 2011 at 1:13 pm

@Steven L. Taylor: I believe in keeping it simple. Considering our current debt status, and how much it’s skyrocketed since the Democrats took Congress in 2007, I find it easier to respect and sympathize with the side that says “let’s stop borrowing, and pay it down” than the side that pushed all that borrowing, and now says “we need to borrow even more, and we’ll worry about paying it back later.”

Simplistic? Yeah. Overly so? I think not.

J.
Steven L. Taylor

July 19, 2011 at 1:16 pm

@Jay Tea: You are still dodging the Tea Party responsibility claim.
anjin-san

July 19, 2011 at 1:32 pm

No one can be perfect but that doesn’t take away the responsiblity for your decisions.

Who said it did? But the bottom line is shit happens, no one can foresee the future with certainty, and the world is full of events that are beyond our control.

No one can be perfect

Bingo. The smartest people in the world make mistakes. So do businessmen. All of them.
Jay Tea

July 19, 2011 at 2:10 pm

@Steven L. Taylor: I believe that addressing the debt today, while it’s 14.6 trillion and damned near our current GDP, will be less traumatic than dealing with it next year, when it’ll be 16 trillion (just to pick a number, but higher than 14.6 trillion), or some point even further down the road. I think that whatever crisis facing up to what we’ve borrowed now will be better than pushing it back.

I don’t think we can afford to keep playing the “Wimpy” card — “I will gladly pay you Tuesday for a hamburger today.”

If you’d like to argue how, in a few years, we’ll be better equipped to pay down an even bigger debt, I’d be interested to read it.

J.
Steven L. Taylor

July 19, 2011 at 2:24 pm

@Jay Tea: I never argued that we can ignore the debt.

I am stating that:

people who do not support raising the debt ceiling = not being serious about the debt.

and that

Many in the Tea Party = people who do support not raising the ceiling,

Hence, by the wonders of middle school pre-algebra, we get:

Many in the Tea Party = not being serious about the debt.

You have never addressed that.
Jay Tea

July 19, 2011 at 3:10 pm

@Steven L. Taylor: OK, I see the problem: I didn’t realize that I was rejecting your fundamental premise:

people who do not support raising the debt ceiling = not being serious about the debt.

So, yeah, by that definition, you can count me in that camp.

But I believe that:

people who support raising the debt ceiling = not being serious about the debt.

I put myself in the “will reluctantly accept, with major conditions” category, but NEVER “support.” To me, “support” is a whole ‘nother kettle of fish — it implies a rejection that the current debt level is not only acceptable, but can be expanded upon safely. And I simply can’t take seriously anyone who would “support” raising the debt ceiling.

It depends on how you define “support,” I guess. Personally, I have an almost visceral revulsion to the thought of “supporting” it.

J.
Steven L. Taylor

July 19, 2011 at 3:19 pm

@Jay Tea: No, the problem is that you have never directly addressed your assertion about the seriousness of the Tea Party on the debt ceiling question.

But, then again, that is pretty much par for the course in a discussion with you. You rarely answer a direct question and almost never directly defend your assertions.

And in regards to your most recent comment, the choice is dichotomous: the ceiling is raised (support) or it is not (not support). The semantics are irrelevant
jan

July 19, 2011 at 6:42 pm

Enjoyed reading posts by SteveP and Jay Tea.

I probably am diverting from the topic and will be reprimanded by StevenTaylor as well. However, what I observed from reading these posts is that the comments by the two listed seemed to have been germinated via their own personal business experience. Kitty was also very detailed in her business paradigm as well.

Others here, though seem to have their opinions extracted from business ‘theory,’ diagramming their philosophies through reading or college lectures. There is a difference between musing about what is the right approach and actually living it.

My own business background started with little financial backing, borrowing start-up seed money, and then working 24/7 to get our business going. Unlike Kitty, we don’t deal with retail. Ours is management and investment oriented. We were always cautious in expanding our horizons so that our debt was never something putting us on the edge of going under. While there were definite risks involved, we always had options and Plan B’s in place where we could cut loose of something and still remain afloat and financially solvent.

Friends used to make fun of us for not “spending” more, and rewarding ourselves with a new car or something to indicate we were “making it.” But, we never felt the need to do that, and just plugged along, getting to a point where we have paid off our debt and are in a position to weather the current financial downturn.

We have two full-time employees, and a plethora of subs we contract work out to. It’s only working, though, because we developed our business model slowly, creating five year plans that were then reviewed to see what was working and what was not. We have maintained a keen eye to not incur so much debt as to have choking us and thus becoming the ruling factor as to how to run our business.

I think you can apply a smaller business model to the bigger government one, if by doing nothing else than applying similar sound principles. These principles involve having pragmatic, doable plans in place, honest oversight, continuously reviewing and updating your practices, allocating funds for financial cushions to ride out recessionary times, having authentic lending practices where a person is legitimately qualified, instead of being part of a social justice scheme, and so on.

Business does not function through magical thinking. It takes time, work, deferring stuff to the future, being honest about how your model is succeeding, and making the necessary changes if it is not. In government today, though, we just layer more bad choices, bills, regulations, debt, committees, bureaucracies onto more government.

Even in the housing market some lenders are being told by the Obama administration to lend to non-sustaining demographics through the same calculus that got us into the sub prime crisis — whereas welfare checks, for instance, are counted as ‘income.’ This is the social justice formula, of progressives, where you strive for fairness of lifestyle for all, no matter whether it can be supported by a person , or what consequences such financial equalizing may render to the country as a whole.
An Interested Party

July 19, 2011 at 7:11 pm

Even in the housing market some lenders are being told by the Obama administration to lend to non-sustaining demographics through the same calculus that got us into the sub prime crisis — whereas welfare checks, for instance, are counted as ‘income.’

Some evidence to support that claim would be nice…
An Interested Party

July 19, 2011 at 7:14 pm

Considering our current debt status, and how much it’s skyrocketed since the Democrats took Congress in 2007…

Yes, of course…the debt is all the fault of those nasty Democrats…tell us another one…
Jay Tea

July 19, 2011 at 7:26 pm

@Steven L. Taylor: I’m trying to be extra civil here, because you’re one of our hosts here.

First up, I don’t speak for the Tea Party. But you’ve set up a no-win solution here. You’ve defined “seriousness” and “support,” and they simply don’t allow any room for debate. By your standards, the only “serious” position is yours, and one either “supports” your position or doesn’t — and therefore is not “serious.”

There’s no room for debate there. To say that raising the debt ceiling should only be done with exceptional conditions that will lead to significant cuts in both spending and the total debt — that doesn’t qualify as a “serious” response. That I — and a significant number of others — simply won’t trust the same government officials who sent that debt skyrocketing in the past few years. I won’t trust them, and I want any deal that involves increasing the debt ceiling with some significant safeguards.

But, I guess that qualifies as “unresponsive” and “not serious” and “evasive” or whatever else you want to call me.

J.
john personna

July 19, 2011 at 8:28 pm

The reason I didn’t really like the original analogy is that if you want to ignore the uses of debt – you can do it in either domain.

You can just pretend that successful start-ups are never started or run with debt.

It’s ridiculous, but if you need it for you politics, you can pretend. It’s craven, but you can do it.
anjin-san

July 19, 2011 at 9:33 pm

First up, I don’t speak for the Tea Party.

Sorry Jay, but you are just a fricking weasel. Steven has pointed out, in his gentlemanly way, that you are full of it. Guess what, he is right, and 98% of the people in the room agree with him. Why don’t you, just once, man up? Your problem is that you are a guy who is just a little bit clever, yet thinks he is very clever. I am sure Steven calls freshman on this sort of thing all the time. A middle aged man should be able to do a little better.

That I — and a significant number of others — simply won’t trust the same government officials who sent that debt skyrocketing in the past few years.

Most of them cheered themselves hoarse while Bush sent debt skyrocketing and when Cheney said ” deficits don’t matter”.
anjin-san

July 19, 2011 at 9:38 pm

Others here, though seem to have their opinions extracted from business ‘theory

Blah, blah, blah. Do you have any other Fox talking points to share with the class?
jan

July 19, 2011 at 10:42 pm

@An Interested Party:

I heard this as a topic on the John Batchelor show. However, below is a link discussing the push back by the administration on ‘redlining,’which is another way to say ‘lower the standards’ in order to be fair.

Affirmative action type lending were the same practices vociferously supported by Barney Frank, in 2006, when the Bush administration tried to strengthen lending regulation regarding buyer qualifications — an effort that failed in the democratic held congress.
jan

July 19, 2011 at 10:57 pm

@anjin-san:

Blah, blah, blah. Do you have any other Fox talking points to share with the class?

Now, there is an educated response! Yes, many people spout business theory in lieu of having no hands-on business experience.

Obama’s administration is strikingly bereft of people with any experience in business. Perhaps this is why there is such a misunderstanding of how to get this economy up and running. All they know how to do is ‘invest’ in more programs, requiring more spending, with little attention to decreasing the debt.

BTW, how long has President Obama had to deal with this looming debt crisis? All year, maybe. And, so why is he all of a sudden threatening all kinds of Armageddon if the debt limit doesn’t rise? If it was this important shouldn’t he have had this on the table long before now, including some semblance of a budget, other than the one that was shot down unanimously by the Senate?

The Obama administration has the least corporate executive experience of any White House in decades.

“Obviously, the Obama administration doesn’t stack up with previous Republican administrations but they don’t even stack up with previous Democratic administrations,” said Stephen Hess, a Brookings institution presidential scholar and veteran of four administrations.

None of your business: On Obama’s public sector cabinet
Steven L. Taylor

July 19, 2011 at 11:13 pm

@Jay Tea:

You are the one who said:

They’re more serious about that than you are

Where the “they” was the Tea Party and the thing that they were more serious about was the debt,

I pointed out that not raising the debt ceiling (a position taken by many in the Tea Party) actually makes the debt situation worse.

You have never addressed that inconsistency Instead you started talking about the debt itself, or about what you would prefer or about the meaning of the word “support.”

Is it really too much to ask how your original statement matches up with the reality of the situation that faces us?
Steven L. Taylor

July 19, 2011 at 11:18 pm

@john personna:

You can just pretend that successful start-ups are never started or run with debt.

It’s ridiculous, but if you need it for you politics, you can pretend. It’s craven, but you can do it.

Except that I never said that. I never referred to start-ups. I was simply referring to the fact that many businesses need lines of credit to function (see the example above by Kitty or the home builder example I provided, among others). The point is pretty simple: some people rely on credit to function and if that credit was to totally go away one day, this would cause a serious problem in those case. This is what the federal government faces if the debt ceiling is not raised, and in spades. I did not attach a normative evaluation of whether this was good or not or whether the situation that got us there was a good one.

I am not sure how trying to explain a situation is “craven” or how it explains a specific set of politics. What I am trying to explain is what is (or will be in the short term) if a certain set of conditions are allowed to occur.

What is it that you think I am trying to say?
jan

July 20, 2011 at 1:29 am

Steve Wynn made news today by his gritty comments about the business climate in the US today. Interestingly, it follows the line of thinking of those who think Obama has mishandled the economy, debt, approaches to health care reform etc. .

The guy keeps making speeches about redistribution and maybe we ought to do something to businesses that don’t invest, their holding too much money. We haven’t heard that kind of talk except from pure socialists. Everybody’s afraid of the government and there’s no need soft peddling it, it’s the truth. It is the truth. And that’s true of Democratic businessman and Republican businessman, and I am a Democratic businessman and I support Harry Reid. I support Democrats and Republicans. And I’m telling you that the business community in this company is frightened to death of the weird political philosophy of the President of the United States. And until he’s gone, everybody’s going to be sitting on their thumbs.

And until he’s gone everybody is going to be sitting on their thumbs
David M

July 20, 2011 at 1:30 am

@jan: Jan, the the CRA had little to nothing to do with the subprime housing meltdown. Also, redlining is the practice of denying banking services to everyone, including qualified applicants in certain (minority) areas, so I’m not sure why someone would complain about enforcing the laws against it.
jan

July 20, 2011 at 2:15 am

@David M:

David, nice article you posted. I intend to look at it more fully when I have time. However, in perusing through the comments below it, I found the following rather long one to be a worthy rebuttal to the very premise of the article —> that the CRA had little to do with the housing melt down.

adoseoftruth
September 30, 2008 8:10 AM
This article is incorrect in its premise.

In early 1993 President Bill Clinton ordered new regulations for the CRA which would increase access to mortgage credit for inner city and distressed rural communities. The new rules went into effect on January 31, 1995 and featured: requiring strictly numerical assessments to get a satisfactory CRA rating; using federal home-loan data broken down by neighborhood, income group, and race; encouraging community groups to complain when banks were not loaning enough to specified neighborhood, income group, and race; allowing community groups that marketed loans to targeted groups to collect a fee from the banks.

The new rules, during a time when many banks were merging and needed to pass the CRA review process to do so, substantially increased the number and aggregate amount of loans to low- and moderate-income borrowers for home loans, some of which were “risky mortgages. Banks set up CRA departments, a CRA consultant industry was created and new financial-services firms helped banks invest in packaged portfolios of CRA loans to ensure compliance. Established and new community groups began marketing such mortgages. The Senate Banking Committee estimated that as of 2000, as a result of CRA, such groups had received $9.5 billion in services and salaries. As of that time such groups also had received tens of billions of dollars in multi-year commitments from banks, including ACORN Housing $760 million; Boston-based Neighborhood Assistance Corporation of America $3 billion; a New Jersey Citizen Action-led coalition $13 billion; the Massachusetts Affordable Housing Alliance $220 million. The number of CRA mortgage loans increased by 39 percent between 1993 and 1998, while other loans increased by only 17 percent.

The CRA was public policy that DROVE the market. To cast a blind eye that obvious econic fact and simply blame “the profit motive” is ludicrous.

It is equally ludicrious to blame Wall Street and investment banks when what they did was buy up the risky mortgages that became so prevelant in the market place.

Granted, no one intened to lose money, but, to lay blame on capitalism when the real source of the problem was government in the first place indicates to me a fundamental lack of economic understanding.
john personna

July 20, 2011 at 2:24 am

@Steven L. Taylor, you’ve got the wrong end of the stick. I’m explaining why a certain sort of critic can ignore you by pretending small business, and start-ups operate differently than they do.

I agreed with you from the start, but saw the counter rhetoric coming.
Rob in CT

July 20, 2011 at 9:23 am

The argument appears to be that the CRA was fine until 1995, when the Clintonmonster loosened things up and created the problem.

In counterpoint to the quote found by jan above (which was echoed many, many, many times in the comments to the article), I noticed this:

I am the Head Underwriter for a large community bank (70+ branches) which falls under CRA requirements. We have never been forced to make loans to poorly-qualified borrowers at all. In fact, some of our borrowers who have been declined by us for a CRA loan have been approved by us for conforming Fannie Mae or Freddie Mac “A-paper” loans!

The fact is that no bank has ever been forced to make a subprime loan by the Community Reinvestment Act. In fact, the overwhelming majority of subprime loans were not made by banks. Subprime loans were made for one reason and one reason only: they were very, very, very lucrative for those who made the loans, with revenues 3 to 5 times higher than those made from prime loans.

Those who claim that the Community Reinvestment Act is even a contributory factor to this mess are either poorly-informed or dishonest. I speak from personal knowledge.
I wasn’t involved in the mortgage business, so I can’t speak from experience. I am deeply suspicious, however, of an argument that seeks to pin the panic of ’08 on poor brown people (or the slightly more nuanced “foolish liberals trying to help them but actually screwing them”).

I think it had more to do with easy money from the Fed, lax regulation (30-1 leverage? really, SEC?), Fannie & Freddie (“quasi-governmental agency? WTF? No), ingenuity (credit default swaps), corruption (Countrywide-Dodd being but one example), and of course the general culture of our (outsized, I believe) financial sector, which includes the ratings agencies slapping AAA ratings on and old piece of junk.

I certainly don’t place all the blame on the Bushmonster. I actually think he had very little to do with it. Greenspan, I think, gets a much bigger chunk of the blame, as do those who constantly rail against regulation of any kind, but I’ve little trouble including Dodd and Frank in my list of culprits. Oversight, fellas? Bueller? This was a bipartisan mess, as far as I’m concerned. The question is how to fix it and try to avoid it in the future. If – IF – the post-1995 CRA rules are part of the problem, then by all means they should be addressed. I’m far from convinced (again, as I think the narrative is terribly convenient for the constantly race-baiting GOP), but it’s reasonable to at least look into it and consider tweaks/clarifications, perhaps along the lines of: Thou Shall Not Redline (but do not lend to unqualified buyers). Redlining is about not lending to anyone in a particular neighborhood, *regardless* of qualifications. Ignoring qualifications – whether to deny a loan or issue one – is bad policy.
Steven L. Taylor

July 20, 2011 at 9:40 am

@john personna: Apologies– I misinterpreted the comment.
anjin-san

July 20, 2011 at 10:10 am

Obama’s administration is strikingly bereft of people with any experience in business. Perhaps this is why there is such a misunderstanding of how to get this economy up and running

Like I said, Fox talking points.

The Bush admin was wildly pro business. There were all about “getting out of the way” of business. Much noise was made about “the CEO President”. Vice President Cheney was one of the country’s leading businessmen.

How did that work out? Oh, yea. They left office with the country on the verge of an outright depression. (But, but, but – It was Clinton’s fault! And Carter’s!).

And now? Now we are now in the alternate reality where all was well until the day Obama took office.
WR

July 20, 2011 at 10:28 am

@jan: Steve Wynn — A man who’s made his entire fortune from fleecing suckers out of their money. Apparently slots aren’t enough, and he’s looking to fleece Fox viewers. Which is going where the picking is easy…
PD Shaw

July 20, 2011 at 10:45 am

Hey JP, stuff yourself and grow up.

Some of us assume that when you post a comment it has something to do with the post, which is how I interpreted it. Not the first time I’ve made that mistake. I let the first insult past, but it’s clear that you want drag whatever issues you have with me from post to post, site to site. I’m not playing.
jan

July 20, 2011 at 11:15 am

@Rob in CT:

I think your post was a fair analysis of the CRA, albeit I don’t entirely agree with it. The CRA superficially looks like it creates an oversight over housing discrimination in a banks practices of lending. There is a carrot and stick, though to most legislation of this type. If you’re ‘good,’ we’ll leave you alone. If you’re ‘bad’ we’ll take something away from you or make it tough on you to operate. That is just the way government works. It’s all part and parcel of regulating incentives and disincentives in order to get the behavior you want, which usually conforms to whatever political ideology is in place at the given moment.

In the CRA it works this way:

The Act requires the appropriate federal financial supervisory agencies to encourage regulated financial institutions to help meet the credit needs of the local communities in which they are chartered, consistent with safe and sound operation (Section 802.) To enforce the statute, federal regulatory agencies examine banking institutions for CRA compliance, and take this information into consideration when approving applications for new bank branches or for mergers or acquisitions.

This is the same way for HUD and affirmative action — all use race/class related measurements to prod businesses/banking institutions to function in a certain way, even if it proves to be to their detriment. Such was the case In lending to unqualified buyers.

It’s true that Frannie and Freddie have taken the major role in these loans, and now how many billions of dollars are they in debt, and always asking for more? No matter who does the lending, it seems, the taxpayer seems to be the shortstop, the fall guy, for taking the financial hit and told to come up with more money (increased taxation being the generally-called for vehicle to do this). After all the government is not an earner, but a director and spender of the private sector’s revenue.

I do concur with you, however, that this whole subprime fiasco is a bipartisan event (although, I do say the dems should take some extra bows for it). Barney Frank was a cheerleader for shoddy lending practices, and Dodd (as you said) dealt with Countrywide. And, as I’ve stated in earlier posts, they were the ones selected to do our banking regulation reform? Greenspan deserves credit for misthinking the fiscal solutions to our economical problems as well.
jan

July 20, 2011 at 11:30 am

@anjin-san:

The ‘talking points’ are all yours. All I did was post stats, charts, and a comparison/contrast to other administrations, both democratic and republican, dealing with the composition of business skills chosen in those administrations. And, Obama’s has come up ‘wildly’ lacking.

When you have a problem you want a specialist to handle it. In this case, we have an economic problem, and who would be most adept in both understanding and implementation of new ways to handle it but an hands-on business professional, rather than a Harvard educated ideologue. This is the way it is in any area of life. When you have a brain tumor, you get a brain specialist, not a person having a PH.D in Zoology!

How did that work out? Oh, yea. They left office with the country on the verge of an outright depression. (But, but, but – It was Clinton’s fault! And Carter’s!).

I’m not sure which era you’re referring to. However, when Carter left office we were in dire financial straits, having the highest interest rates I can remember. Reagan pulled us out of that mess. When Clinton left office, we were riding high economically on the wings of a dot.com boom and a highly efficient republican congress who pushed Welfare reform and other measures that Clinton wisely adopted. However, the dot.com bubble had come to an end and was bursting as GWB took office. You compound that with his late start putting his administration together, and then 911, a mere 8 months into his term, it’s a wonder we did as well as we did to counter the economic obstacles thrust upon this country at that time.
john personna

July 20, 2011 at 12:39 pm

@PD Shaw:

Lolz, you DO think you are thread police
anjin-san

July 20, 2011 at 5:09 pm

Jan… so you are going to duck the fact that bush handed off the worst economic crisis since the depression to Obama, as well as the fact that bushes rabidly pro business administration had the worst job creation record of any modern president?

Can’t say I am surprised.

Stick with the cutting and pasting and tea party bromides… it appears to be all you have to offer.

Oh, and bush does not get a pass on his dismal economic record because 3000 Americans were murdered in the heart of new York city on his watch.
anjin-san

July 20, 2011 at 9:08 pm

I’m not sure which era you’re referring to

Really? Do you have reading comprehension problems?

Only one President in our lifetimes has left us on the brink of a depression. That would be Mr. Bush.

As for Carter, he was indeed a poor leader, but the economy was in the toilet throughout the 70s, Republicans seem to have some selective memory issues here, just as they seem to forget that Bush left an honest-to-goodness economic disaster on his desk for Obama to deal with.
jan

July 21, 2011 at 1:50 pm

@anjin-san:

A little late in my response because of being out of town….

You tend to initiate comments to others by sarcasm and/or putting them down…I wonder if that is because that’s all you have, in your bag of superficial knowledge, on what is going on historically and in this country today?

Where you are correct is that GWB did little in his job creation during 8 years in office. In fact he was the worst president ever, statistically, in adding jobs:

Bush on jobs: the worst track record on record

However, what can be said about Bush was that he did continuously add jobs, versus losing them like Obama has done, during very difficult economic and traumatic times as well. Bush inherited a blooming recession from Clinton, and then had to deal with the economic fallout from 911, and the fiscal drain of going to war. But, despite that, jobs did dribble in, and few were lost during his presidency.

According to the Bureau of Labor Statistics, the economy added more jobs than it lost during 50 out of 52 months between September 2003 and December 2007. The economy lost jobs over two months during that stretch — between June 2007 and July 2007 (20,000 jobs) and between July 2007 and August 2007 (71,000).

That falls slightly short of being “uninterrupted.” Gillespie would have been correct if he’d said that jobs grew for 46 consecutive months.

We might add that over the course of Bush’s presidency — a total of 96 months — the economy created 1.08 million jobs. That may sound like a lot, but compared to every other post-World War II president prior to Obama, it’s the lowest average annual percentage increase in jobs created. (See our calculations here.)
That said, Obama’s figures are worse than any of his postwar predecessors’. The economy has shed between 2.4 million and 3.1 million jobs during the 18 months he’s been in office, depending on whether you start counting with the January 2009 figures or the February 2009 figures.

Politifact checking Gillespie’s statement on Bush record on taxes and job creation

Also, just to note, anjin: those are some pretty broad statements you make about the Carter administration etc. But, you supply no real stats backing it up. It’s just political fanfare on your part, and dem talking points from perhaps moveon.org. In both instances Carter and Obama may have come into a weak to bad economy, but they did nothing to make it better, only worse. Carter’s economy was mind-numbing at the end of his term, while Obama continues to consistently lose jobs with almost each and every job report that comes in. Just check the latest one, which is always preceeded by the media’s soft-shoeing it as yet another “unexpected” job’s report, housing stat, manufacturing number, or consumer data .

Obama has done nothing for this economy except to slow it down even more. I’m tired of hearing about his inheritance from Bush, too. No one disagrees with that. It was a bummer. But, Obama has not improved it one iota, even with two years of complete power and some of the highest margins of power ever, in both houses of Congress.

This current debt ceiling crisis is not only due to Obama’s lack of leadership in formulating a budget for over 20+ months, but it’s also Obama’s economy, more than Bush’s, as of many months ago, as he has done relatively little to solve it, and has only pushed us more into debt.
john personna

July 21, 2011 at 6:48 pm

@jan, seriously?

You just did the one thing that paints an ideological zealot as totally abstracted from business or economic sense. This after all your claims of special knowledge.

They are Obama job loses, not Great Recession job losses. That’s what you are telling us.
jan

July 21, 2011 at 6:57 pm

@john personna:

Obama is the President. He owns what happens in this economy as well as any job losses. The same for Bush and other presidents during their time in office.

On a personal note, I believe if Obama had not concentrated on passing health care when there were so many objections to it, had he emphasized jobs, business incentives, fewer bail-outs, that we would have a more noticable recovery going on than we do today. This is my opinion. I think Obama has been an utter failure as a leader and a President….and, because of this business people are just treading water waiting for him to leave office, and hoping they will be able to financially survive in the meantime. There is no confidence in this man, among many here and also abroad.
Steven L. Taylor

July 21, 2011 at 7:07 pm

@jan: Of course, by that logic, Bill Clinton was one of the best presidents of the 20th Century.
john personna

July 21, 2011 at 7:07 pm

@jan:

Obama is the President. He owns what happens in this economy as well as any job losses. The same for Bush and other presidents during their time in office.

Well, if I’d asked you to post something stupid to define yourself, you could not have done better.

Presidents are judged by their responses, but let’s face it. Obama arrived on the scene after the accident. The Great Recession began a couple years before he was elected president.

You are seriously telling us that it’s his fault he didn’t magic it all away.

OK. Now we understand who you are.
anjin-san

July 22, 2011 at 12:04 am

Obama is the President. He owns what happens in this economy

Well then I suppose he owns the tremendous bull market that has taken place since he took office. I know my 401k has done some serious ass kicking since then. But how do reconcile that with this statement you made?

But, Obama has not improved it one iota

I don’t know about you, but when I review the performance of my investments over the last 2.5 years, I see lots of iotas. And then there are all those major American corporations that were near failure as Bush was leaving office. Now a lot of them are sitting on record cash reserves. Does that somehow not count as an improvement? Obama does own the economy after all. And then there is the fact that the American auto industry still exists. Consider all those jobs, and all the downstream jobs for vendors that support that it. Consider NASCAR would probably fail if the American auto industry went away. How much economic activity does that represent? Is Carl Edwards going to be the last man standing? Will Smoke kick it up a notch and be in the chase? We are going to have a chance to find out. Thank you, Mr. President.

I

wonder if that is because that’s all you have, in your bag of superficial knowledge, on what is going on historically

Do you really want to get into it with me about history? What do you want to discuss? The Second Punic War? Did Henry VIII later regret the annulment of his marriage with Anne of Cleaves? Was Matty Van Buren Aaron Burr’s illegitimate son? Pick a topic…

dem talking points from perhaps moveon.org.

Hmmm. My reading list is the Wall St Journal. The Economist, Business Week, The SF Chron, OTB, politicalwire.com and occasionally TPM. Where did I pick my Dem talking points up – wsj.com?

Obama is the President. He owns what happens in this economy as well as any job losses.

According to you, Clinton did not own his booming economy. It was due to the GOP and a little luck. I guess Democrats only own negatives.

I’m tired of hearing about his inheritance from Bush, too. No one disagrees with that. It was a bummer.

A bummer? A bummer is the girl you like not going with you to a high school dance. Bush’s economy was a disaster of historic proportions.

The reason I have not responded to you seriously is that you have done nothing to show you merit a serious response. You ability to cut and paste does not impress.
jan

July 22, 2011 at 12:56 am

@anjin-san:

May your stocks continue to flourish, along with your 401K, anjin. But, I don’t necessarily rate how well the economy is doing by such a yard stick. Wealth in stocks can be here today and gone tomorrow, all depending on how viable and strong the economy really is, which includes real jobs being offered, a stable housing market, healthy consumer confidence, and all the other indexes used to measure a thriving economy versus one that is just being propped up by non-productive stimulus plans, quantitative easing, printing money, interest rates without a pulse.

Corporate earnings look good because they have reconfigured overhead and are having decent profit margins being produced by a smaller work force and inventories on hand. It’s all done with an economic sleigh of hand. But you want to toot your horn and say lookie, lookie what a wonderful thing is happening here!

But, anjin, continue putting your head in the sand thinking all is good because you have a democratic administration in the WH. I will guarentee you, though, if there was a man/woman with an R after their name, functioning at the same level as the current president is, bailing out car companies who ultimately cost taxpayers $1.3 billion dollars, smoozing with GE CEO’s who then don’t pay any taxes, running up deficits, that on a graph look like the hockey stick equivalent used to heighten global warming claims, you would be singing a different tune.

And, you may be well versed historically, but I don’t see you applying much of it here.

BTW, my cut and pasting is done for the benefit of those who are always saying “prove what you are saying.” So, I post the links and quotes to do just that.
anjin-san

July 22, 2011 at 2:53 am

. But, I don’t necessarily rate how well the economy is doing by such a yard stick.

Moving the goal posts are we? Earlier you said:

But, Obama has not improved it one iota

Are you now retracing that statement – or do you just want to pretend you never said it?

It’s all done with an economic sleigh of hand.
anjin-san

July 22, 2011 at 3:06 am

But, anjin, continue putting your head in the sand thinking all is good

When did I say “all is good”? Please point this out, I must have missed it. Can’t? Then I guess you are just making crap up.

I will guarentee you, though, if there was a man/woman with an R after their name,

Since I started voting, I have voted for more Republicans for President than Democrats. Can you do no better?

Corporate earnings look good because they have reconfigured overhead and are having decent profit margins being produced by a smaller work force and inventories on hand. It’s all done with an economic sleigh of hand

Cutting overhead, increasing margins & productivity and better inventory management are “slight of hand”? I see, though I think most people would refer to those simply as “sound business practices”.