We Didn't Need Bank Bailouts
John Tamny writes at Forbes about how Amazon and Walmart rose up in a tight credit market to provide lines of credit for small business clientele who were struggling due to the inability to get loans elsewhere:
Back in the summer of 2010, with its small-business clientele suffering from tighter than normal credit, Walmart's Sam's Club subsidiary announced its willingness to provide its customers with $25,000 lines of credit. Walmart has for years tried to get into banking, absurd regulations about new entrants arguably kept it from purchasing some of the insolvent banks in '08, but even without a banking charter, Walmart was able offer up credit at a time when banks weren't able to.Much the same is occurring now at Amazon.com. Traditional banks remain careful about lending, but Amazon, flush with cash, is eagerly substituting for the banks. Through its Amazon Capital Services subsidiary, Amazon is helping the sellers on its website to access credit that is in short supply at the moment from banks.
Getting into specifics, the Wall Street Journal recently reported on Lisa Zerr, owner of Yankee Toy Box, and her urgent need to secure credit in order to upgrade her inventory ahead of the holiday shopping season. Yankee Toy Box does a lot of business on Amazon, and she's since borrowed from Capital Services $38,000 in July, and then $13,000 last month.
It should be stressed that Amazon is one of myriad companies that uses its balance sheet to provide banking services to customers. Not a traditional bank, it acts as a bank, and is a substitute for a limping sector.
Amazon's story naturally exposes as fraudulent the hysterical assertions made by politicians, Fed Chairman Bernanke, and numerous members of the commentariat who said absent bank bailouts in '08, the economy would disappear. They were wrong then, and they're wrong now.
As for the monetary mystics out there who write column after column about how the Fed's payment of interest on [bank] reserves (IOR) is keeping lending abnormally tight, the Amazon story similarly exposes them as incorrect. Indeed, while it's certainly true that the Fed should not be paying banks for the dollar reserves it's attempted to force on them through quantitative easing, the simple truth is that even if IOR were the reason for banks being tight (it's not), substitute lenders would, could and are filling the breach.
He notes that insolvent banks should have been allowed to go bankrupt in 2008, and the Walmarts and Amazons and banks that were careful lenders would have risen up to fill the void.
via @againstcronycap
There is also a category of lenders called Business Development Companies, which are not banks. (I'm an investor in several of these.) BDCs don't have depositors and don't get money from the Fed; they obtain funds from shareholders and bondholders (leverage is limited to 1:1), and they make business loans, often with an equity kicker in the form of warrants.
The banking industry in the U.S. gets far too much political preferment. Former FDIC chairman Sheila Bair's new book is pretty interesting on this point.
david foster at October 16, 2012 7:09 AM
The government stole the assets of GM from the bondholders to support the UAW. The Green Energy business is a thinly disguised looting of the Treasury by corrupt political contributors. Then we have Fannie and Freddie and the whole mortgage cesspool.
Business is great - for thieves and grifters and politicians. Excuse the redundancy.
MarkD at October 16, 2012 9:03 AM
"...and the Walmarts and Amazons and banks that were careful lenders would have risen up to fill the void."
But the politicians, bureaucrats and bankers (i.e. MarkD's "thieves and grifters and politicians") didn't think of that. In their delusions of competence they don't believe there could be any solutions or ideas or possibilities they didn't think of themselves. Even if they did predict that the Amazons, Walmarts and thousands of others "would have risen up to fill the void", they probably would have taken steps to prohibit that from happening.
No matter what the problems are - economic crisis, drug abuse, poverty, "global warming", air pollution, credit, whatever - three hundred million people independently running their own lives and businesses, voluntarily cooperating with anyone they please, will come up with infinitely more good ideas and solutions - more alternatives, choices and possibilities - than a few hundred grandiose politicians, bureaucrats and other crooks ever could.
There is something morally and/or intellectually wrong with people who are deluded enough to believe they have the ability, and the right, to plan and manage something as complex as the economy.
Ken R at October 16, 2012 1:20 PM
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