It occurred to me while responding to a comment in my Chasing Value column that there are some basic necessities in life that we do not normally think of as such. The discussion had to do with finding those intrinsic or basic things a company (stock) produces that might reduce investor risk or help establish basic value.
Food and water clearly matter to everyone, and you could add energy, but until the economy freezes up like it has the past year, you might not appreciate the importance of credit.
The single biggest reason that car dealers say they cannot move anything off the lot is a lack of consumer credit. People have tapped out their credit cards and home equity lines, and probably their friends and family by now -- so it is all pay as you go. The going is rough and the going is slow.
The Federal Reserve has now reduced the overnight rate to nothing in an effort to get financial institutions to free up some of their capital and to lend to each other. They have also been trying to push mortgage rates down. They were successful in doing so because many lenders have offered me rates under 5% for 30-year fixed mortgages just this past week.
I am sure there will be a flood of people wanting to refinance their homes and condominiums, but they will find that, although the rates are lower, the standards to qualify are much higher than they were when they last took out a mortgage. Borrowers will also find their appraisals are coming in lower.
The ability to borrow is also affecting large and small companies that require short-term cash to make payroll and longer-term money to get past the Wall Street carnage. The auto companies, banks, and insurance companies have all gone begging to Washington for credit.
Our nation, the good old United States of America, is the largest borrower in the world. This is not a good thing and it is hurting us now, and it will hurt us more in the future, But what's a country to do?
Sheldon Liber is the CEO of a small private investment company and the principal for design and research at an architecture and planning firm. He writes the columns Chasing Value and Serious Money.
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Reader Comments (Page 1 of 1)
12-21-2008 @ 6:43PM
william lindblad said...
Credit certainly is an essential. Ancient concept based in trust. Trust is essential to credit. Extending credit to people whose ability to pay was questionable is at the bottom of this human predicament. For a financial system to work properly the bankers/finance leaders have to be pillars of trust. They failed, miserably, at their duties to their depositors, investors and communities at large. The government should have let them fail. Fear ruled and poor and irresponsible management remains widespread in the banking industry. They lined their pockets and continue to do so, now at taxpayer expense.
Interesting? Congress would have the execs of the U.S. auto industry resign for lack of business foresight. Yet, as you point out, you can't get a loan to buy a car.
Somehow this whole scenario does not make good sense.
12-21-2008 @ 6:48PM
Sheldon L said...
...and WL, congress should cut its perks along with the auto execs'...wouldn't that be novel!
12-21-2008 @ 8:13PM
pat said...
Have you ever heard of microfinance? Its about giving loans to those in poverty. Mohammad Yunus - Noble Prize Winner 2006 wrote about it in Banker to the Poor. As the President of a small investment fund - we do microfinance in South and East Asia - and I am sorry to say - this is where you find value. I have no desire to make a loan to the auto industry execs - when I can make a loan to a micro-entrepreneur - why? because I know I will get paid back. Our default rate is less than 1%. Our interest rates would make you blush. We are capitalizing on market inefficiencies and the real desire of people who want to work.
12-21-2008 @ 8:57PM
Sheldon L said...
Pat,
I have heard of micro-finance programs and have donated to a couple the past few years.