Publisher's Note: I need credit, dude
By Jody Reese
When money was cheap no one complained. It fueled a rise in all property values and in values of stocks and private companies. Life was so good. Values were just going to keep increasing. CEOs took big pay packages, banks took in huge fees and loaned out huge amounts of money (sometimes 30 times what they had), investors and the Chinese bought up every bit of debt available. Homeowners used second mortgages (now neatly called home equity lines) to buy all sorts of goodies. You could have just declared bankruptcy, been living in a tent and gotten a mortgage to buy a $300,000 house with zero down. Man, times were good.
Then just as quickly and without any more reason, times stopped being good; we know the story. Now our government is engaged in a grand plan to get us back on the road to prosperity.
At the nexus of that plan is credit. Senator Jeanne Shaheen and many of her fellow senators brought New Hampshire-based Coed Sportswear co-creator Mark Lane to Washington, D.C., to testify in front of Congress about how the banking system is broken because they won’t lend his company money. Shaheen complained that banks have been telling her they have money to loan, but business owners have been telling her the banks won’t loan to them — Lane is such an example. A $1 million credit line was frozen.
While I completely sympathized with Lane, when did it become a bank’s responsibility to loan out money? In fact, we as depositors want our banks to be conservative with our money. After all, it’s our money they lend out. I find it hard to criticize banks for not lending to a business that — such as Lane’s — didn’t make money in 2008. Would you lend his business money?
It’s confusing. Banks got into trouble — that the federal government had to bail them of of – for lax lending and now Shaheen and others want banks to loan to businesses to get us out of trouble?
We want credit; we even may need credit; but we can’t expect to have a right to credit. For example, we as a rule at Hippo do not extend credit to new advertisers or new businesses. We extend credit only for businesses that have passed the five-year mark and sign a personal guarantee. Our suppliers have similar practices.
Credit got us into this mess and cajoling banks to extend more of it should not be what gets us out of it. That will not create lasting economic growth. We need to base our economy on creating real value; that’s building things, increasing our population; digging thing out of the dirt, and creating new technologies. Sure, credit will be needed to get some of these things off the ground, but it should be a very small part of the value.
You don’t need a huge bankroll to start a business. Start small, work hard, reinvest your profits and find good people to help you with your plan. That’s the future of small business and I think the future of our economy, if we do this right.