Friday, March 13, 2020

The market to the rescue

I've been worried that businesses can't get loans to keep going during a virus shut down. Everyone seems to be jumping to the idea that we need rivers of Federal money.  Maybe I should have more faith in the free (well, this is banking, but somewhat free) market.

(Thanks to an anonymous correspondent for the tip.)


  1. 90 days interest free? The Spanish flu lasted 2 years. Sure, medical care is better now and there's no world war, but economies have also never been so interconnected and modes of travel are much faster.

    In 1918 some Chinese getting sick in Wuhan wouldn't have shut down Italy in a few weeks.

    This time it really is different.

  2. Well, a business can apply for a loan from a bank. It does not mean the bank will grant the loan.

    My experience in trying to get business loans from banks is that you have to post collateral, and in practice that means real estate.

    I think this is a sensible precaution on the part of banks, which are in the business of making money, not charity or public service (yes, despite what some regulators think).

    If you have unencumbered real estate, and a bank does not think real estate values are going down, you can get a loan.

  3. Massive SBA Loan Program? Expand it?

  4. Let us hope these new enterprising banks, alert to opportunity, do not get very many eager (qualified) applicants. That would mean the potential-applicant businesses aren't actually desperate (assuming they are 'qualified'). [e.g. the demand impact is not as severe]

    The real issue with these credit-expansion policies is that real resources are shifted to less-likely-good applications.
    In a world of Zero interest rates, after all, who cares.

  5. John, I think this is the real risk: small business loans and credit cards. I thin the Fed should take direct measures to stimulate an extension of credit lines. I'm not sure the current offered OMO will do it, unless a concrete commitment to buy credit ABS is offered. This was not done during the crisis.

  6. "The market" isn't coming to the rescue. This a 5-year floating rate term loan, interest only payments, with the principal amount paid at maturity. The loan amount depends on creditworthiness of the borrower (the ability to repay and service the loan). The amount of $200,000 is the maximum amount available to any one borrower. The loan will impose a first charge over the unencumbered attachable assets of the borrower. Clearly, the number of successful applicants will be small in number.

    Federal, state and local governments are first in line and have the ability to collect from owners and directors and officers should the business entity default. Tax relief is a possible remedy, but none is currently on offer.

    The small business owner with a triple-net lease, fixed and variable franchise fees, and employee payroll expenses, can only hope that the current emergency is over with quickly. If not, the second best he can hope for is a quick and relatively painless business wind-up. Given recent moves by governments local and state to shut down non-essential retail operations, there will be a rapid increase in business failures and bankruptcies in that sector, a.s. The human cost from that is likely to be severe. The only market player that will come to the 'rescue' will be the 'vulture capitalist' at 5 cents on the dollar, if that.

    A replay of 1929? It appears increasingly likely that we are headed that way.


Comments are welcome. Keep it short, polite, and on topic.

Thanks to a few abusers I am now moderating comments. I welcome thoughtful disagreement. I will block comments with insulting or abusive language. I'm also blocking totally inane comments. Try to make some sense. I am much more likely to allow critical comments if you have the honesty and courage to use your real name.