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I have been a participant observer in the American system for some years now. I have worked as an employee, as self employed participant and as a small businessman responsible for others. I know what it feels like to look into someone's eyes and see desperation, fear of not knowing how to pay his next bill. I have witnessed the rise and fall of small businesses as a result of inability to obtain credit facility for working capital.
What is happening now in the global market, especially in the US, is a trickle up effect of a crisis that started a long time ago, which hit small businessmen years earlier. Now that it is beginning to affect the big corporations everyone seems to notice. It is a cumulative effect of the loss of confidence in the US credit system. A ripple effect of a sudden break in the flow of the nutrient that sustains the economic life of America.
The US is a society driven by credit, from the individual credit cards, personal loans, home equity loans and mortgages to lines of credit extended to corporations. The system stays perfect if undisturbed but crumbles immediately there is a break in the chain. Contrary to government's belief that the problem is bad investments made by banks, the real problem lies in the attempt by banks to break the flow of funds into the system by tightening up credit conditions. They simply stopped giving mortgages and loans as freely as they did a few years ago. When they upped the conditions, the people had less to spend and less new credit lines to help service existing loans. The defaults started as a result. People who used to survive by rolling debt over from one bank to another, could no longer do so. There are no new credit offers, no new balance transfer opportunities, no new mortgage refinancing hence no new source of funds to continue the roll over that has sustained the individual. And from the micro the problem extends to the macro, corporations were soon affected and finally the banks who no longer make money because the are not growing the sources. The solution? Is it an an end to capitalism as the buy in and bailout trend portends?
The solution is neither in extreme regulation nor deregulation but a mixture of both. The solution is in ensuring that banks regain confidence in borrowers' ability to pay the loans. To achieve that, the borrowers must have their jobs back, they must have their mortgage loans and credit facilities back. Which happens first seems like the chicken and egg question. Both must happen at the same time, developing simultaneously for the crisis to be over. It does not matter how much money government pumps into the banks, if banks stay the high ground of keeping tight credit conditions, the problem will linger.
