The 700 billion dollar bail out has the world markets on an unexpected terrifying roller coaster ride. Fear and innuendo are guiding the global stock markets that are in serious need of Prozac. Although each of us would appreciate a few million dollars and promise not to spend it on spa’s and expensive dinners like AIG did with a portion of their save –the- banks- money, our lifestyles will be affected if the banks cannot start to play nice with one another. If you are a small business, say an Arizona gnome maker in Phoenix, and your clients are in Japan, the gnomes are shipped by rail to L. A. and by ocean barge to Japan. Before the journey begins, the Japanese buyer provides a letter of credit to the Arizona gnome maker for money that will be wired to his Phoenix bank upon delivery. The Phoenix business owner takes the letter to his Phoenix bank to get credit to build more Arizona gnomes. The breakdown is between the Phoenix bank not accepting the line of credit to the gnome maker and the Japanese bank not extending the line of credit to the Japanese buyer. Paying with suitcases of cash is not an acceptable form of payment for gnomes unless they are Colombian and the buyer is Tony Soprano.
The smart guys that devised the bail out plan left out one provision: mortgage interest rates. The mortgage rates have bounced up dramatically and the Suits are standing around with stunned looks on their faces. Dudes, move it and make some changes. The housing market will not recover if the mortgage rates are high. (Hey, I did not even go to Harvard or work at Goldman Sachs for this solution. And I always accept suitcases of cash. )
FYI: Our front yard gnomes (made in Phoenix, not Columbia) gave our SUV a going away party this week. With gas prices continuing to drop, our giant, gas loving vehicle has retained the parking place of honor in our driveway. The drawback for lower gas prices is that the push for alternative fuel is fading
I am still stunned that banks which lent to anybody without collateral before (do you remember those 103 % LTV loans) now will not even accept collateral.
In a letter of credit transaction, the banks could collateralize the goods being shipped by simply having
the bill of lading assigned to itself. However, the evidence as pointed out here Letter of Credit Forum
is anecdotal. The same story is being repeated over and over again. IN regards to the economy, one has the impression that the traders who only recently were irrationally exuberant are now irrationally downbeat.
I believe that with Obama president, the mood will change, not because Obama has such a smart
economic stimulus package, no, simply because he introduces a new era.