Well, you’ve probably heard about the multi-billion dollar loan package that Congress passed this last week.  I’m slightly ambivalent about this.  I wouldn’t have done it but I think I understand the basic workings of the financial system to understand why Congress did it.  Frankly, the extra 100+ billion of pork is a whole lot of crap but that’s Congress for you.  As to whether or not it will work… well, I don’t have a crystal ball and refuse to eat glass.

So what’s the deal, what’s happening in our financial system.  The bottom line is too much debt.  I know of at least one billionaire who six months ago thought businesses could be leveraged up even more than they already were.  He may be a billionaire but I disagree with his opinion.  So, what happened.  Banks loaned too much money to too many people who are now unable to pay. 

This tightens the money supply because the bank was counting on the repayment of the loan with interest which didn’t happen.  This means that because the bank didn’t receive their expected money back they will take a hit on what they actually do get back.  Once they do get the money back it will be less than what they loaned, and then they will loan it out again.  This normally is just a standard business risk, you win more than you lose and you make a profit. 

So what’s happening this time that is different?  In my opinion, banks made so many bets on such a large scale that they are having trouble collecting on all of the outstanding loans that are in default.  What this has caused is a cash shortage so they are unable to make new loans (hopefully less risky).  This will impact you if you try to borrow for anything whether credit cards, car loans, school loans, mortgages, etc.  It may indirectly impact you if your company is unable to borrow money to conduct business or bridge loans to cover for revenue shortfalls.  Of course, at the end of the day I’ll tell you that you or the company shouldn’t have borrowed in the first place because that is inherently risky.  Anyway, moving on.

So how does the government anticipate their package will help “fix” the credit crunch.  First, let me preface this with the statement that I haven’t even come close to reading the entire bill.  It’s very long and it would take me a couple of hours to read and another couple of hours to digest.  Here’s my understanding based on the limited knowledge I have. 

Number 1, it’s not a get out of jail free card.  No one on Wall Street is being handed 700 billion dollars in cash.  Second, the government is offering to buy distressed loans at pennies on the dollar.  This means that the government will buy loans which have assets under them that are worth more than what they paid for it.  Yes, they will have to collect (most likely resell the loan) the money but the underlying asset is worth more than they paid and technically they should be able to make a profit if managed correctly.  I’ve rarely seen the the words managed correctly and the government in the same sentence but hey, it could happen.

That’s my synopsis, whether you the package or not it’s a done deal.  I personally wouldn’t lose much sleep over it.  Whether you or I agree with it doesn’t matter anymore.  Frankly, I don’t think it’s the end of the world as we know it.  You can be mad at your congress person all you want… and I encourage you to communicate with them respectfully, honestly and bluntly.  I don’t personally think this is an issue worth making a voting decision, but I respect your decision to do so. 

That’s it for now… over and out!