Monday, September 29, 2008

Credit Crisis

With the government's finance bailout plan in ruins, the next stage of the credit crisis has already begun. Banks are reducing credit lines on credit cards, which will effect both consumers and small businesses that rely on credit cards for day-to-day operations. Apparently it's been going on for some time, but lately the pull back has been accelerating. One analyst predicts credit cards will implode by early next year. Credit card interest rates are also on the rise, with the increased risk. Some numbers:

In July, a survey of senior loan officers by the Federal Reserve Board found that during the preceding three months, 65% of U.S. banks had tightened their credit-card lending standards by raising required credit scores or lowering existing credit limits. That was up from the April survey, in which 30% of banks reported tightening their standards.

As a business we rely on credit cards for most of our cost of goods purchases, with about $20,000 a month cycling through several cards, some business and some personal. For the most part we (me and the business) pay off cards in full every month, with some cards used as lines of credit and short term loans.

What will this mean for the game trade? If credit cards are tightened up significantly, many small manufacturers will probably be stopped in their tracks. Distributors will probably be fine, except that many retailers use credit cards to pay them. This might gum up their works as well. Retailers like myself can probably survive on less credit, but we'll likely have a transition period of cash flow problems in which new product is passed in favor of increased liquidity. Consumers at the end of that chain will likely see a similar transition. Reduced credit is only part of it, as the banks are likely to raise rates and make the use of credit more expensive.

While the government pondered the financial bailout over the weekend, they had no problem sneaking in a giant $25 billion loan package for the big three auto makers. These companies deserved to fail, unlike the millions of small businesses that will likely suffer now. The big three have spent their R&D on SUV's and high performance cars while their competitors rightly focused on economy cars and efficient technology. It's an election year and both candidates have promised them cash for their foolishness, so here we are again.

And finally the credit card holders bill of rights was passed by the house over the weekend. The president promises to veto it.


  1. Loans to the automakers will keep people employed. In all honesty, they built what people wanted and the government didn't really support alternate fuel types. They still don't, or else they would be working on electric grids, hydrogen, and nuclear power.

    I am mixed when it comes to Wall Street. Mainly because they have money and I don't. It is hard for me to be sympathetic. But, logically, I know something must be done or America will be facing a pretty harsh wake up.

    We are not in a depression yet.

    I don't think we have even qualified, by the book, as being in a Recession. But we are getting damn close.

  2. Building what people wanted is their usual excuse for SUV's and the like, but doesn't Toyota build what people want? Don't I sell what people want? What business intentionally builds and sells what people don't want? I just think they're another example of an industry that gets bailed out when the going gets tough, thus there's not enough incentive to *really* build what people want.

    I think the big three need to go away and clear the ground for companies that were more progressive and build what people want *now* rather than the big three's attempt to re-tool themselves to meet future challenges.

    I'm a little surprised about the reaction to the bill's defeat. Apparently there is a lot of animosity towards this "rescue." I can't believe I'm using Bush's euphemisms. Then again, what's the worst that could happen? I guess we'll find out.

  3. The Wall Street bailout package is far more justified than the automotive one. How many times now have we bailed them out?

    I don't buy that they were just answering consumer demand. They created much of that demand through marketing as a way of getting around government regulations on fuel efficiency.

    Other companies saw the trends and brought more fuel efficient vehicles to the US market, but Detroit was blinded by the higher profit margin on SUVs. It's not like it's even a matter of more R&D. They make more fuel efficient vehicles already for foreign markets, but they refuse to market them in the US because they don't want to create competition for their more profitable SUV lines!

    Those kinds of decisions should be rewarded with failure.

    Instead we are rewarding poor business decisions, and we're rewarding efforts to circumvent government regulations.

    When it comes to jobs, the collapse of the big three would be minor compared to the collapse of Wall Street. Chances are that given the weak dollar foreign auto makers would buy up much of the assets and shift more production to the US. Smaller domestic auto makers with an eye on the future would also have a chance to develop.

    I think that some sort of Wall Street bailout is necessary, but a Detroit bailout was not.

  4. BTW, I have a simple solution to the problem of rewarding companies for failure with government bailouts. Make it a provision that any company that accepts a government bailout must immediately fire its CEO with no severance package.

    I guarantee you that fewer companies will rely on the government for bailouts in the future.

  5. I disagree with you both.

    The auto companies, government, the people. WE are ALL to blame. Like we weren't buying what was being sold. I own Toyotas. It's all I buy. But neither one is fuel efficient, not by a long shot.

    The auto companies did not single handedly create a need for fuel inefficient vehicles. Just as the mortgage companies did not single handedly screw the entire country. It was a bunch of folks, including you and me.

    I can't even continue on this rant, even though I have so much more to say. People are stupid and shifty and no one wants to take any of the blame.

    We get the government we deserve.

  6. As it's not my business that has failed and I'm not foolish enough to own an American car, I don't see how it's my fault. I don't see why my tax dollars should bail out a bad company, especially one in a crowded marketplace that won't leave a dangerous vacuum.

    The average mileage for our two Japanese cars is over 30MPG, above average for the industry. I'm pretty happy with that and I've decided any future car we buy will need to get around 40MPG with today's standards. There are no American cars with that kind of mileage that are worth owning, at least none that they sell in the US (several in Europe).

    There's a saying that goes something like: When you owe the bank a couple hundred thousand dollars, the bank owns you. When you owe the bank a couple hundred million dollars, you own the bank. Get to be big enough and economic forces are warped and you can call the shots.

  7. The irony is that the "American" auto makers do most of their actual production in Canada and Mexico, while Honda, Toyota, Volkswagen, and BMW all build cars in America.

    I was listening to some "expert" analysis on the radio that claimed that the number of jobs in auto manufacturing is stable or growing in the U.S., but that they are just moving away from Detroit, the "Big Three", and the UAW.