Credit Crunch Update
Well, the Federal Reserve Bank of the United States held their special auction for banks yesterday and it was reasonably successful. They put another $20 billion of liquidity into the US banking system. A similar auction will happen again in the near future. So what does that mean for small businesses?
Good credit news: The Fed is able to manipulate the availability of credit among banks to some extent. It means that the velocity of money is picking up slightly. More velocity. More money available for businesses to borrow. the wheels of industry are greased with credit. Generally, everybody gets into a better mood to do business, as opposed to hording cash.
Bad credit news: $40billion dollars only allows the Fed to manipulate the fringes of the cricis of confidence around the sub-prime mortgage situation. the central problem remains of who is holding notes backed by these mortgages. Until they are washed from the system, banks will continue to be worried about lending to each other with the continued strain on lending to industry and the general public.
There is a proposal to establish an agency to buy up the sub-prime mortgages and manage the orderly handling of these situations. Lenders will have to take less money for the bond that these mortgages support, but it is a way out. It is a proven idea from the Great Depression.
To those who feel that the market should be allowed to handle the mortgage bubble, be careful what you wish for. The market can be incredibly harsh and volatile. Once it gets moving in one direction psychology takes over and the market acts less and less rationally. Sometimes, for public safety, the market forces need speed bumps.
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