“BUT I SERVE AN UPSCALE, RECESSION PROOF CLIENTELE…”

3/11/09

As I’ve been saying for months (years, really), those experts who contend that the root of our financial problems lies in the housing crisis have it wrong. Housing is more a manifestation of our larger problem, i.e., far too much debt at all levels, but primarily at the household level, that has fueled a Potemkin economy that must be allowed to unwind. Housing is only one of the vehicles used to secure and thus amass such debt and also one of the “beneficiaries” of consumers’ access to debt that they would never have been granted under more normal, sober circumstances. The unwinding of the easy, what the hell, it’s not my money debt fueled Potemkin economy will be long and painful, and any attempts, especially the ham-handed attempts that characterize the Bush/Obama economic approach, to ease the discomfort will only prolong the agony.

One of the manifestations of the overall debt problem is the behavior of businesses in response to the reckless flow of consumer debt. To put it simply, firms really believed that consumers actually had the money they were spending. However, those consumers never had the money they were spending; what they had was access to liability creation. Businesses, however, having drunken the kool-aid (How frequently have you heard such drivel as “Oh, these people are really well-heeled.” “My customers have deep pockets.”?), priced their products and services and expanded their businesses as if they had customers with big bank accounts and high, stable incomes rather than large credit lines, either unsecured in the form of credit card payables or secured in the form of home equity lines of credit. When those “wealthy, upscale” consumers no longer had access to liability creation, business imploded.

This is indeed, if not a tragedy, an utter abashment for such businesses. But that is how a free market economy is supposed to work: if one behaves more like a sheep than a reasonable, thinking, critical business person, one should pay the price. The best will learn from such lessons, pick themselves up, and prosper once more. Those who had no business running a business will find some other type of work. Unfortunately, it is highly unlikely in the Bush/Obama era, in which the responsible are made to pay for the irresponsible, that such a free market outcome will be the result. Instead, large businesses will be propped up and, if things go far enough, even some politically favored small businesses will also be kept alive by the application of generous amounts of federal succor, courtesy, ultimately, of those who behaved responsibly and took the time to open their eyes rather than repeat the happy talk cant that has substituted for sound economic observation for the last twenty years or so. And the mistakes and garbled thinking that got us into this mess will be repeated…again and again and again.