This was Bill Clinton’s slogan in 1992, and it’s the slogan again today, although no one seems to be using it. No major candidate seems to have anything to say on today’s events. What’s happening today?
Well, Bear Stearns, an investment bank I remember from my childhood as my dad’s investment bank (they underwrote the public offerings of companies he took public as an investor, attorney, and advisor), will now cease to exist. After almost a century of high flying, they will be J.P. Morgan Chase. Which itself is an agglomeration of former individual banks that have disappeared.
Here’s what I believe will happen, and what its impact will be on the entrepreneurs I work with.
1. The last eight years have divided the rich from the poor in shocking ways, dealing out the middle class and removing opportunity in Amrica by strangling public education. Now the rich have had to look at the fact that they are not immune from what happens to the poor — if the banks and financial systems go down, in a moment they are no longer rich. Friends of mine who are retired and invested in mortgages are freaking out right now.
2.Established businesses are beginning to lay off. A friend of mine who has been in the homebuilding business for thirty years and runs a very lean and mean business says he has buyers who still buy lots, but can’t get financing to build. He’s also worried that he will have to lay off people. And that his bank will be in trouble.
3. The Fed ordered Bear Stearns to be bought for $2.00 a share rather than to go bankrupt. That’s basically a semantic issue. When a company goes from being worth $3.5billion to being sold for $236 million two days later, it means all valuations are bull.
4. Bear can’t be the only bank in this position. 2008 and 2009 will see another double digit decline in home prices, which means any bank in the mortgage business will ultimately be in trouble. We may wash out most of the big banks.
5. Homes are being foreclosed at the rate of 2 million a year. No one has ever seen this before. Consumers will go wacko when they see this, because they don’t know what is going to happen.
6. Credit will dry up for the consumer as well.
7. The 0% interest credit cards that startups outside Silicon Valley use to start their businesses will stop coming. So will bank loans to established businesses that want to expand.
8. The Boomers will panic, because they are nearing retirement. This will force a change. I’m not sure what the change will be, but there will be a major government response to this — from the Republicans, the believers in “limited government.” Already the Fed has jumped in to make the Bear Stearns transaction happen, which gives the lie to limitd government. Face it, we all want government when we need it.
9. We will decide as a country to get out of Iraq because we can’t afford the luxury of building democracy elsewhere when we are starving at home.
10. A smart politican will decide again to balance the budget and rebuild our country’s infrastructure, including our health plan. This is the only way to build jobs, confidence, and hope.
Sound familiar? We were here in 1933. It was called the Great Depression. What to do now?
Start a bank. Any bank without baggage from the past will be welcome and successful.
Start a company. Talent will be cheap, and we will need technology to solve both environmental and economic problems. You will have to bootstrap it, but that’ how we used to do it anyway.
Take responsibility for your own health. You can’t afford to get sick right now.
{ 4 comments… read them below or add one }
Actually the Bear Stearns deal was even worse than Francine is making it sound. Of the $3 billion in assets they claimed they had, $1 billion of it was their skyscraper at 1 Madison Avenue. That means that to arrive at a $236 million sales price, the rest of their combined assets and liabilities were valued at zero to substantially less. That JP Morgan Chase feared it was less, possibly a lot less, is shown by their demand for Federal Reserve guarantees against losses. That the Federal Reserve also feared that it was a lot less is shown by the fact that they gave the guarantees.
Actually the Bear Stearns deal was even worse than Francine is making it sound. Of the $3 billion in assets they claimed they had, $1 billion of it was their skyscraper at 1 Madison Avenue. That means that to arrive at a $236 million sales price, the rest of their combined assets and liabilities were valued at zero to substantially less. That JP Morgan Chase feared it was less, possibly a lot less, is shown by their demand for Federal Reserve guarantees against losses. That the Federal Reserve also feared that it was a lot less is shown by the fact that they gave the guarantees.
I think business for long time runs a very lean and mean business says he has buyers who still buy lots, but can’t get financing to build.
Yes, that’s the credit crunch. Most businesses need lines of credit, and when the banks freak out and start freezing or not extending lines, it affects business and can make things worse.