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February 17, 2009

STEPHANIE SALTER: Repeat (often): The only thing we have to fear is fear itself

By Stephanie Salter

TERRE HAUTE — Collected anecdotes and observations that feed the beast of extreme unease about the economy:

• In the space of 24 hours, I heard a couple of scary stories from two longtime “small” business owners I know who have companies in Indiana. (“Small” meaning annual revenue is in the single-digit millions, not billions.)

Neither guy can get an ordinary short-term bank loan for customary operating capital or necessary maintenance upgrades.

Neither guy is in Chapter 11, neither has conducted business in the red, neither has been turned down in the history of his respective company for previous loans exactly like these.

Both owners have excellent track records going back at least three decades. But, unlike Wall Street investment firms, these guys aren’t considered big enough for a taxpayer bailout — or even a regular short-term bank loan.

No one knows where the bailout TARP billions have gone within the U.S. banking system, but the money definitely is not being used for the purpose stipulated by Congress — freed up credit for American business.

For the two men I know, the lack of loans could be the end of one’s company; he can’t make payroll for his two dozen employees, let alone provide service to his loyal customers. The other man, at best, will lose his company’s affiliation with a national franchise that is mandating the maintenance upgrades.

• Under the heading of “Those Who Do Not Learn From History” is a bit of wisdom from Chapter VI, “Credit Diverts Production,” of Henry Hazlitt’s “Economics in One Lesson.” Published in 1946 (note some odd spellings), the book has been reprinted. A pal saw this in the 1978 edition:

“Government-guaranteed home mortgages, especially when a negligible down payment or no down payment whatever is required, inevitably mean more bad loans than otherwise. They force the general taxpayer to subsidize the bad risks and to defray the losses. They encourage people to ‘buy’ houses that they cannot really afford. They tend eventually to bring about an oversupply of houses as compared with other things.

“They temporarily over stimulate building, raise the cost of building for everybody (including the buyers of the homes with the guaranteed mortgages), and may mislead the building industry into an eventually costly overexpansion. In brief, in the long run they do not increase overall national production but encourage malinvestment.”

• Random factoid: Americans currently carry about $9 billion in personal credit card debt.

• Related item: It was the mighty credit card arm of the banking industry that lobbied heavily ($100 million in about eight years) and finally prevailed in 2005 when Congress made it more difficult for individuals to declare bankruptcy.

My favorite provision of that Abuse Prevention and Consumer Protection Act? Payment of credit card debt was deemed a higher priority than child support.

n Want to seem smarter than the average guy or gal on the barstool next to you?

When someone starts talking about the parallels between now and the Great Depression, opine that our current crisis actually looks a lot more like the Panic of 1873 and its economic fallout, known as “the Long Depression.”

Part of the fallout: In September 1873, things were so bad, the New York Stock Exchange was closed for 10 days. Over the following two years, some 18,000 U.S. businesses went under (rates for short-term loans to businesses were stratospheric). Then, the national unemployment rate climbed to 14 percent (25 percent in big cities such as New York and Chicago). More than a quarter of the nation’s railroads failed.

Dozens of analyses of the Long Depression are available on the Web. One of the briefer and easier to digest is an essay from October in the Chronicle of Higher Education (chronicle.com). Written by Scott Reynolds, a history professor at the College of William and Mary, the article reviews the causes — this one started in Europe and spread to the over-expanded United States — and the cascading effects of too little action taken too late.

n Here’s a personal suggestion regarding those 700 folks at money-losing Merrill Lynch who received $3.6 billion in bonuses just days before being rescued by the Bank of America — with financing from U.S. taxpayers.

All of them, especially the top four who pocketed $121 million among them, should be given two choices: Give that money back, right now (with interest), or be brought up on the financial equivalent of war crimes.

You say there are no such laws? They should be passed and enforced, retroactively.

• Spirit-lifting thought for the generations before and after us baby boomers: You will have your revenge. We of the so-called Me Generation will never, ever be able to retire. We will have to work until we drop dead.

• Poetry corner: The current flurry of theories and boasting among economists reminds me of a great Stephen Crane poem. (Crane was born two years before the Panic of 1873 and died 28 years later.)

A learned man came to me once.

He said, “I know the way -- come.”

And I was overjoyed at this.

Together we hastened.

Soon, too soon, were we

Where my eyes were useless,

And I knew not the ways of my feet.

I clung to the hand of my friend;

But at last he cried, “I am lost.”

• Finally, a capital idea from John Hodgman of the Daily Show with Jon Stewart.

“Who do you need in a crash?” Hodgman asked last week after Stewart said the economy was crashing. Hodgman showed a photo of US Airways Capt. Chesley Sullenberger.

“He’s the only one who can pilot this nation to the soft water landing we so desperately need,” he said, then suggested a new currency, “Sully Bucks,” to replace the Washington dollar and restore confidence in the U.S. monetary system.

Sounds as workable as anything else these days.

Stephanie Salter can be reached at (812) 231-4229 or stephanie.salter@tribstar.com.

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