Credit is NOt the Problem

With the government scrambling for a monetary solution to what has been labelled a credit crisis perhaps it is time to reassess the issue and see what is really behind all this chaos. First of all lets look at the "Big Three' and their ability to finance a business that is losing money hand over fist. If you were a banker and a company came to you and said , " I know I'm losing money but if you'll loan me some money until things get better I'll pay you back." As a banker with a recognition of sound banking principles you would reply, " How will you pay me back if you are losing money, you are not offering me any idea how you will change to make your business profitable and what if "things" don't change?" The big three essentially were asked that by Congress and had no answer. However, since the money was not being supplied they took some action such as laying off workers and shutting down plants or in essence cutting their loses by moving toward cost control.

Getting credit is not a problem is you have a good idea and can persuade the lender his risk is practically nil. What banker, no matter how lean his funds would turn down a low risk loan to a well established customer who could show his method of payback was solid? That is what bankers are in business for. Sure there are loan sharks that will take a high risk loan and require a high interest to cover the loans they won't collect on. That essentially is the role the government has decided to take on but with a low return prospect. This shows that government thinking runs counter to solid business principles which looks to profit as a guiding axiom.

People who say there is not enough money out there are really saying there is not enough money to loan to bad risks. It is a bad risk to take on a bundle of unrecoverable mortgages and expect them to turn out to be profitable. It is a bad risk to pour unaccountable funds into a bureaucracy that hasn't a clue what to do with it or where it is going. The first response by government to any crisis is to throw money at it and the result can only be inflation. Throwing money at a bundle of poor risk loans will not reduce the risk of the loans nor make the borrowers credit worthy.

This frenzy of pouring paper money into an economy that is suffering from a bunch of bad managers who rose by the political ladder of sucking up to their boss has left those who reached a position they were not qualified for sucking up to government officials to bail them out of their incompetency. In business this approach of promoting by favoritism leads to people in positions of authority that , lacking independent thinking, look for a higher authority to remedy their mistakes instead of planning ahead to avoid mistakes.

The executives of the auto industry knew they were on shaky ground by agreeing to labor contracts they could not afford. Yet they avoided taking a stand. Why? Because the company leadership gave the order to keep the business going at all costs. That cost was the condition they now find themselves in. The auto industry is not the only business in this strait. The governors are lining up and everybody else who put off the decisions they should have been making. It all centers around a very simple tenet. Don't spend what you cannot afford.

This doesn't just apply to today's spending but also the adverse consequences of what tomorrow may bring. This is why there is such a thing as crop insurance. Those who refuse to consider it think nothing can go wrong. When it goes wrong it is the result of their bad decision to avoid a method of covering the loss. What did the auto makers do to cover their possible long term losses? They knew they were spending more per car than their competitors and yet they persisted. Now they are going to the government with the same story a good banker wouldn't buy.

The auto makers are claiming they are too big to fail. There will be a huge job loss. Well yes it is true there will be a huge job loss of overpaid workers who want more for their labor than their competitors are paying. Union leaders knew this was happening it was on the nightly news yet they , like many short sighted politicians, thought they would pursue their course as long as they could get away with it. The auto executives enabled this illusion and the result was they ended up begging on Capital Hill with the same story they knew wouldn't fly at the bank.

This country has bloomed on the notion that if you simply get along and don't stand up for what is obviously right but may stir up a controversy you will succeed. The fruition of that notion is the state of today where toadies thrive in a diminishing economy that requires integrity and courage. Going along with the crowd and pandering to the voters whims or the politician's unprincipled stances produces people who try to get away with the impossible. Home ownership for everyone and a bankrupt auto industry have more in common than simply not enough money in the system. You can pour all the money you want into bad loans and poor risk and you will still have a failed economy. The answer is not in a government check or from the mouth of someone promising one. The answer is in the ability to think and act on principles that work , have worked and will work. These principles center around what it takes to create profit. This forgotten aspect of business has been diluted to "corporate responsiveness", "spread the wealth" and "sacrifice". None of these catch phrases suffice to reinstate the principles of business that are required for a thriving economy. They are merely diversions from the important essential ingredient that fuels prosperity. That , dear reader , is profit.