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Something I don’t get about business and bailouts

I don’t really know what the right answer to the $700 Billion Dollar Bailout Question is (I have not read the bill, and I wonder if the bill really describes what would happen). But the whole situation does remind me of a related question: is it really the end of the world if the “credit markets freeze?” It is a disaster if the equity markets tank for a period of longer than a year or so (prevents people from retiring and so on)- but I am not sure if all of the consequences we are being told really follow.

If the reason to bail-out Wall Street is to “protect retirement savings” why not just dump the $700 Billion into Social Security and make Social Security a needs based program?

Here is one story we are being told. Without the bailout the credit markets freeze. If the credit markets freeze then “main street” is hurt because businesses can not borrow money. This causes actual economic damage and everybody is really poorer.

I understand the credit markets increase the money supply and generally promote growth. But it might be okay if they were temporarily unavailable. My experience in trading is that when you buy or sell in a finance market: most of the time the counter-party in a trade is another hedge fund or speculator- not somebody actually doing anything productive with the money. So most of transactions lost to a freeze really helped nobody you would care about.

Also, why should businesses always need credit? Many respected businesses (Apple, Google, Microsoft) have tens of billions in cash reserves and likely do not need credit. Others (Oracle) have huge cash positions and debt positions as the same time. I have a feeling that a credit crunch will punish over-extended business that have weird balance sheets more than businesses that run on a sound financial basis.

If you think all businesses have a “rocket science” accounting ability (they produce reports that nobody else can understand and we just balance our check books), consider this. I have regularly seen offers of early payment (net-10 days instead of net-20 days) if a you accept a 10% cut in your bill. Now if you think of this as a favor you might accept it (a supplier should always be willing to offer 10% off to make a client happier). If you think of this as a payday loan (which is what it is) the supplier would be paying an interest rate that compounds to 569% annually just to get their money 20 days earlier. If this is what is considered “financial engineering” we do not need it in this world.

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Data Scientist and trainer at Win Vector LLC. One of the authors of Practical Data Science with R.

1 reply

  1. Update- one of the big businesses added value to its “to be paid on time you must off a discount scheme”: they went to net-90 day payment. For you consultants out there Alan Weiss had a preemptive tactic for dealing with this. He found out that many billable departments had a policy that required them to always payment terms if a vendor discount was offered- so he offers a discount if they pay in full before the work is performed.

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