The Coming National Bank

Make no mistake; the economy is on the brink of a minor depression. So too, is the world. The United States has trillions of dollars in bad debt. Much of it is owned by financial institutions that have yet to completely fess up.

The first $350 billion in the bailout TARP package sent a small ripple through the financial community, salving fears of imminent collapse, but it has done nothing to swell the company coffers to the point where they will part with cash in the favor of loans to individuals and businesses.

Let me give you an idea of how bad this is has become. I have a client that is a very successful company. The company has no debt. They have millions of dollars in cash. They earn millions per year, and have tens of millions in annual revenues. This company went to purchase new company vehicles. The dealer was running a “special,” where financed vehicles received an additional $1,000 off the purchase price. This sounded like a good deal, so my client applied for financing. They were turned down. This is one of the most solid, privately held companies you will ever find, and they could not get credit from a car company that is dying to sell cars. How is the rest of American business going to survive and thrive? (By the way, this company simply paid cash for their cars.)

As low as interest rates are, banks still do not have the money to lend, or the margin for error that will allow them to take any risk at all. As the great philosopher, Mr. T used to say, “Pity the fool.” In this case, we are all fools.

All this leads me to believe that we are going to see one big time national bank. I would prefer the scenario where a separate bank is formed. This bank purchases the “bad debt” from major institutions and works out arrangements with the homeowners. If done right, there may not be too much of a loss. Eventually, this bank can wind itself down and stay out of the way.

The alternative is for the U.S. to begin purchasing existing banks. This would begin to fully nationalize banks, causing a whole host of new issues. Congress helped create this mess by mandating that Fannie and Freddie give low credit loans (some claim that this reached 50% of all loans). While I cannot fault the intent of the legislation, I can fault its economic soundness. This was bound to fail.

This would have become a problem, but nothing on the scale we have seen. What Congress failed to see (as did most other financial experts) was that investors (and investment banks) would rely on statements from Fannie and Freddie that these loans were sound. Capitalism would seize upon the interest rate plan and leverage these things to the hilt to create enormous profits and enormous (unforeseen) risk.

We ain’t in Kansas anymore. The world has changed—forever.

As much as I hate to see it, there are many good people, myself included, who are feeling the strong pinch of this economic slowdown. It is like a vice clamping down on opportunity. If business is the engine that pulls our prosperity, capital is the fuel that makes it run. We can have the best people, the best products and the best technology, but if we lack the capital to run our businesses, the whole train shuts down.

I expect that talk will quickly heat about creating a national bank. It will be another big hit to our national debt. I estimate $4 trillion. If done properly, this cost could shrink to less than $1 trillion by the time the debt is wound down.

When this comes to pass, and it will, look for the stock market to make a 20%-30% rally, as uncertainty fades. Then get ready for a long road back to our former prosperity. The increased national debt, plus our government’s inability to reduce its spending, has cause me to lower my growth expectations significantly.

All this said, we are still the land of opportunity. We have the intellectual capital and ingenuity to better our world from where it is today. Yes, we will have higher taxes. But there is great hope for anyone with the will and perseverance to succeed.

This reminds me of an old quote. It goes like this:

Press on. Nothing in this world can take the place of persistence. Talent will not. The world is filled with unsuccessful individuals with talent. Education will not. The world is full of educated derelicts. Genius will not. Unrewarded genius is almost a proverb. Persistence and determination alone are omnipotent.

Press on!

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