Monday, September 29, 2008

Banks may call back risky loans, even from good customers

The impact of the financial crisis of the past couple of weeks has created lots of hyperbole.

With the quasi-nationalization of parts of the financial industry (and the auto industry may not be far behind, by the way) we have become the United States of France, according to an essay published at Time.com.


A caller to a local radio show one morning said we've become the USSA — the United Socialist States of America.

But what does all this mean for the millions of entrepreneurs across Middle Tennessee? How might the current financial crisis and the remedies being put in place in Washington affect small business in Nashville and other cities across the country?

First, credit will be much harder to get, says Mike Diegel of the National Federation of Independent Business, a small business lobby.

"There is less for the Wall Street banks to lend to each other, and likely a little less for community banks to lend out," he said. But debt is the last thing any entrepreneur needs more of right now. So, a tightening of credit may not be as big an issue as it seems on the surface.

Also, credit will be much harder to keep. As I have warned for some time, banks will be setting higher standards for business loans.

We can expect that some will start calling in loans from people who have never missed a payment.

Some businesses have just become too risky for the tighter standards the banks will have to meet from worried regulators. The events of the past month will only make regulators put more pressure on banks to clean up their loan portfolios.

More than ever, cash is king and queen, prince and princess, emperor and master of the universe. Need I say more?

The possibility of higher taxes will make all of this even worse. Government seems poised to tax its way out of this mess. We will have to if we have any hopes of paying for all of the commitments that are being transferred from the private sector to the federal government.

The "soak the rich" strategy that is now gaining steam means that entrepreneurs will carry most of the higher tax burden. Higher tax rates on entrepreneurs mean fewer new businesses will form. If this happens we lose the real engine of our economy — entrepreneurs — and the economy may stall.

The U.S. Supreme Court's Kelo decision of 2005, which expanded eminent domain powers for governments, has added individual property rights as another potential victim of the nationalization of our financial system. It has resulted in the most drastic weakening of property rights in the history of the United States.

This also will dampen our entrepreneurial spirit. The ride is only beginning, so hang on to your hats.




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