The Fed and Boomers in Small Businesses
March 16, 2008 by jim
Sorry for the sports analogy, but it fits. It’s never good to see a football coach get away from his game plan in the middle of the game. Adjustments to a game plan at half-time are fine. Making significant changes to a plan regardless of circumstances leaves the people in the stands wondering if the coaching staff understands the situation on the field.
Up until last Friday the Federal Reserve was following the financial game plan fairly well. They went for some unusual actions, but nothing outlandish. On Friday they did something that hadn’t been done since the 1930’s when they lent money to a commercial bank, J.P. Morgan, to lend to an investment house, Bear Stearns. No need to get into the details of how Stearns got to where they are or where they are going. The fact that the Fed had to resort to something akin to a “flea flicker”, double pass, to maintain order in the financial market says a lot.
First, such activity says that things are very bad in the financial market. It isn’t sub-prime mortgage bonds. It’s the value of the underlying assets of all bonds. Second, and most troubling, the people who are supposed to know what’s going on keep getting surprised.
You need to realize that many of the things governments and central banks do take time to work their way through the market. The Fed has provided a way for Stearns to get it’s act together over the next 28 days. Hopefully everybody will be less excited at that point. If we are really at the point where the surprises are ending then the Fed’s move with Stearns will look brilliant.
What should small business people do while all this works its way out. Not to over do sports analogies, but play defense. Postpone any cash outlays that you absolutely, positively don’t have to make. Buy in smaller quantities. The size of cash outlays means more that cost per unit of inventory. Call your banker and see how your line of credit is doing.
There is still plenty of money out there, but there is substantially less than a year ago. People are looking for safe investments. You should too.