seattleSavant.com

Companies cannot borrow:

Some small companies say they are no longer able to get loans from newly cautious banks as credit tightens across the country, and even those who do qualify are increasingly reluctant to borrow and expand, fearful of overextending themselves in the midst of the financial crisis.

State governments cannot borrow:

Massachusetts State Treasurer Timothy P. Cahill this week approached the U.S. Treasury and the Federal Reserve Bank of Boston about lending Massachusetts money under the same extraordinary terms the government is giving banks and Wall Street firms during this financial crisis, The Boston Globe reported.

The request was prompted by the state’s inability to borrow from the short-term debt markets because the financial turmoil has essentially caused credit markets to stop lending or charge prohibitive rates, The Globe said.

(FYI, this is nothing compared to California needing an emergency loan of $7 billion dollars from the Federal treasury, to just meet its short term obligations. And they’re struggling to get that credit, too.)

This is how the irresponsibility of Wall Street will ultimately undo us all. Not by scouring our tax dollars but by collapsing profitable companies–profitable because we use them, rely on them–and by collapsing the state governments that provide even more crucial services.

The bailout package was intended to prevent exactly this. By taking away the most toxic of the debt held by banks and directly pumping cash into their coffers, it was hoped that lending by these banks to businesses and state governments would resume.

By the nature of things like Net 30 payment terms, we’ve had a grace period. As we’re hitting about a month away from the collapse of Lehman Brothers and the start of this panic, things could start getting very ugly for people living paycheck-to-paycheck and businesses that must wait for a while before receiving payment for their work.

Let’s say we’re a company that does laundry for hotels around town, on Net 30 terms; our customers have 30 days to pay us for the work we’ve done for them.

But we have to pay our workers’ paychecks every week. While waiting the 30 days for our customers to pay us, we might borrow money for a few weeks to fund the paychecks. No big deal. When the customers pay, we pay back the loan.

These are the loans, short-term and low-risk, that are drying up as banks panic and hoard cash for themselves rather than lending it out. Companies, even profitable companies that have reliably met their financial obligations, are now having to resort to usurers (demanding 30% interest rates before lending) to finance their basic operations. Companies perceived as being on shakier ground might not be able to borrow at all.

The customers in this example (the hotels) also rely upon short-term lending to pay their costs (while waiting the 30 days for vacationers’ credit card companies to pay them). If they can’t get a short term loan, we won’t get paid. If we don’t get paid, our employees won’t get paid. State governments can’t borrow, either, and thus run the risk of defaulting and failing to pay out state payrolls.

Thinking about this series of short-term loans like a food chain, falling apart in front of our eyes, is particularly depressing.