A friend of mine, a small business owner, is typical of many thousands of cash-strapped entrepreneurs in Ireland at the moment.
He has a small business and the demand for his product is strong. The market is resilient and in any other country he’d be fine and probably employing a few more people.
He is in the reasonably enviable position of having customers, but as he has no credit, he finds it almost impossible to trade his way out of the current difficulties. Many business people have neither customers nor credit, this man has customers but no credit and because he has no credit he can’t buy his stock and without the stock he has nothing to sell. He is turning away good custom – custom that has been with him for three years – because he doesn’t have anything to sell to them.
Up until last year, the importer of the products (from the UK) normally extended credit to its Irish retailers. The retailers then could stock up, wait for the punters to come in and, once the products were sold, the supplier was paid.
Given the extreme openness of this economy and our reliance on many products made in the UK, this type of arrangement would be entirely normal.
But all this stops in a credit crunch. Normally, the supplier can offer credit terms to his retail clients because his bank is giving him decent terms, so everything flows from the top.
However, let’s go back to the bottom, to the retailer who has a shop on the street of your town. He pays staff and rent and is the end point of the domestic economy.
His story is the story of the credit crunch in middle Ireland. It is the tale behind the Central Bank’s credit figures, which tend to be announced every month on the news. My friend is debt-free. He has always traded tightly and yet now he is on the verge of going under.
A credit crunch spreads like a virus through small businesses, from small supplier to small supplier, as everyone chases outstanding bills. As the chase intensifies, credit terms get shorter and shorter and in the absence of a large provider of credit, such as at least one healthy bank, the system dries up.
It is worth fleshing out what happens when credit begins to dry up.
It begins with the banks not extending liquidity and working capital to decent businesses, because the banks themselves blew their balance sheets by excessive lending. They are deleveraging and are paying back money to their creditors. The banks have to get their loans to deposits ratio down to 100pc, this means taking in more money and lending out less.
Banks rarely stop lending because they want to. After all, this is what a bank does, it makes money from lending to people. In a credit crunch, the banks are compelled to reverse a decade of reckless lending.
The credit crunch spreads like a virus in a creche because everyone – even businesses that manage to keep their credit lines open – can get nobbled by a supplier that is in trouble.
This supplier may look for an extension and, in a short while, the balance sheet of a strong trader can begin to look messy. Where there used to be cash, there are now creditors. Where there used to be money, there are now IOUs.
The bank sees these and gets windy. Working-capital limits are then cut. This will be particularly the case where small businesses are involved because the bank will be cost-cutting and slashing headcount. Maintaining relationships with small businesses is costly and banks in cutback mode will keep the large accounts serviced and just ignore the smaller ones, particularly if they are troublesome.
This brings to mind Mark Twain’s famous quip that: “A banker is a fellow who lends you his umbrella when the sun is shining, but wants it back the minute it begins to rain.”
FOR many small businesses, one of the main reasons why they have seen their balance sheets weaken is that, at the height of the boom, many were advised by pension sharks, bankers and the like to convert their cash on the balance sheet into deposits for leveraged land speculation. The flipside of leverage in a boom is deleveraging in a crash.
As the nation tries to pay down debt and sell the assets on the balance sheet, the price of assets will fall further. And because the price of assets, such as houses and property, is falling much more than interest rates are falling, the negative impact of the debt on the balance sheet is amplified enormously.
Rising property prices in the boom implied that the real cost of borrowing was negative – because if prices were rising at 15pc per year and the interest rate was 5pc, the real interest rate was minus 10pc.
Now think about when the price of property is falling and the rate of interest is stable – the real rate is massively positive, crippling the borrower. This process is far from over.
Up until now, the banks have been hoping that property prices will rise again, this is why we have not seen so much property being sold. However, all this is changing.
In my local town, five properties have come up for sale in the past two weeks. There will be more. This is a sign that we may be going into the final phases of the property cycle. The banks have given up on the market and are going to sell at whatever price they can get.
My friend with the cash-flow problem still faces his dilemma because the banks will not lend for cash-flow purposes when they are in deleveraging mode.
So where is the opportunity? There is an enormous opportunity for a new bank to come into Ireland that can extend working capital to decent businesses. It would seem to be obvious for the State to make a few new banking licences available and then actively go out and solicit business. New capital will dramatically increase the potential of this country.
Credit is a virtuous cycle. You give one guy a few more months and some cash and he gives the next supplier a break, then the retailer can get stock and have enough time to sell and the process of commerce kick-starts again.
It is win-win for everyone. Surely that’s not beyond us?
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At last the penny seems to be dropping that our banks are an impediment to our economy. Bring in new banks and we will see new credit and mortgage rates that drop when the European Central Bank rate drops. People will move to these new banks and the existing ones will collapse gracefully like they should have been allowed to do 6 years ago.
This isn’t a new problem. It was – in many ways – a deliberate goal of government policy.
I wrote about it in 2009. Of course it went beyond NAMA, but NAMA was relevant too.
http://www.independent.ie/opinion/letters/dont-chase-good-bankers-away-26564321.html
It can be done it just takes effort and willpower. The struggle is about the regulations that are in place. These impede newcomers. http://www.burnleysavingsandloans.co.uk/about-us/ After the recession began in the UK late 2008 to early 2009, David found that many of his customers, through no fault of their own, were struggling to obtain loans from their High Street Banks. These were loyal customers that he had done business with for many years, and whom he had complete faith in. Burnley Savings and Loans Ltd officially opened its doors in September 2011. The company was created and is managed by David… Read more »
There’s a way around bypassing the Bank’s to acquire lending…..” Crowd Funding ”
https://www.linkedfinance.com/
I for one hope this work’s here in Ireland as the Banks are sucking the life outta every entrepreneurial brain we have…
Little or no Credit or Lending = little or no Cash Flow = Little or no Business = THE INEVITABLE. ..CLOSING DOWN. .
Paraphrasing Mises: “When you have credit lending in excess of people’s voluntary savings – An artificial boom followed by a bust follows”.
Added to the mix are the Local authority apparatchiks’ demanding stasi-style hiked up “rates” – to fund their excesses and waste.
You couldn’t make it up.
The Bank of Dave! – Which they tried to close but their where no laws that they could find which legally allowed them to close it. I need a new printer so while walking past a local shop I said to the person next to me I must check the printers out the person next to me replied “you’re not that well of now to be supporting the local business”! – Circling to the bottom! TODAY OR AT OTHER TIMES, FEEL FREE TO SKIP BY MY POSTS AND IF YOU DO FEEL NEED TO READ THEM YOU ARE NOT OBLIGED… Read more »
Correction:
TODAY OR AT OTHER TIMES, FEEL FREE TO SKIP BY MY POSTS AND IF YOU DO FEEL THE NEED TO READ THEM YOU ARE NOT OBLIGED TO RESPOND. Sorry Small phone big fingers
Morning David Have you heard about “Positive Depositor Preference” ?..it is the new catchphrase agreed in dublin castle at a meeting of EU Finance Ministers when they agreed to steal money from depositors who have more than 100K in the Bank.No gurantee accounts under this amount are safe……. On the same day we were in Court in front of the Master regarding some cases when a Barrister representing A.I.B addressed the Master asking him to adjourn a LOT of A.I.B cases till October..this is very unusual..! We need to go back again and find out why Mathew Elderfield is leaving…is… Read more »
Actually, David, KBC are about to start building a retail business in Ireland – I suspect for that very reason. There is a huge gap in the market, and a good deal of “good” custom out there who have been roundly rogered by the Irish banks, and willing to move. I for one ended my relationships with the Irish banks in 2004 and will never, ever bank with them again – at whatever cost which at the moment really means I largely have to live credit-free.
K.B.C were bailed out in Belgium..had losses last year of 922 Million euro.
I can say I have meet some representatives from K.B.C in relation to restructuring debt with their customers and their attitude is a lot more positive than Irish Banks..saying that , still have not heard back from their credit committees in relation to individual cases so being professional is all I can rate them positively for today.
To clarify..
When you meet Irish Banks and their representatives their attitude towards customers is somewhere between rude and downright hostile.
Imagine if all Irish savers pulled deposits from AIB and Bank of Ireland (similar to what the corporate deposit market did in 2008), we would have two run down agencies with essentially no funding and still very large losses to realise, not a very stable place for ones cash! it’s very simple – If banks here had confidence in their loan books and their capital position, they would be lending and they are not (net new lending is negative – in order to shrink their funding requirements with ECB / Central Bank). Net result is that Irish domestic banks have… Read more »
Hi,
“smart new bank that gives us the credit we’re due”
Why didn’t they do this back at the start?
I’ll never know but crowd funding is what I suggest is the correct methods from now on. The dummies books people even have s book on crowd funding. It’s vital particularly if you look at the bill still video the wizard of oz
Thar business’es break the usurus trap they keep falling into.
Welcome to the Keynesian nightmare of your own creation. You want credit you can’t get it, but don’t worry. Your Government has borrowed it in your name.
I don’t see why you are concerned for your friends business. The government will stimulate his business through investing in growth.
All he has to do is pay his taxes and be happy that the credit is flowing into the system.
He can make his money investing in stocks and bonds.
It’s the smart economy, stupid!
The lesson from this article is that trap of monoploy. In what other industry are you forced to go and deal with a giant ass hole who is crap at his job! There is a massive need to disintermediate the banks. Not reform them, because they won’t. Not restructure them, because that propagates the monopoly. Make those losers compete. Remove their monopoly! Your friends needs credit. You have a brain. You were an investor. Why are you not promoting the idea of peer to peer lending? Competing currencies, like your Kilkenny marble. Or the Wir in Switzerland. Enough of this… Read more »
Just wondering if there was a deposit run on the banks how long it would be before the government stepped in and closed the banks for a week and then start to steel the deposits held with in.
No more smelly fivers thanks to the new crisp fiver but how long will it be before they become smelly?
The pork pie government we are turning a corner ,we are being fed a large bucket of vomit. Look you can give money to small company’s but if joe soap has not money to spend whats the point. I know loads of people out there that can’t get payed for goods and services,some have been spun a merry dance lie after lie. Some have gone back to jobs they have done and tried to remove goods and being told by police to leave,so to options walk away or go down the legal route. You might get a judgement but still… Read more »
The government and the Troika have killed the domestic economy ,making new jobs is not going to improve the domestic economy unless you improve the take home pay of the large amount of people who owe to much money.
The spenders have been the people who have being hit the most.
Sure if your mate has sure thing demand David, why not lend him some money in return for a cut of the profits? Cut out the middle men.
Have the plan for new Bank done for last fours years. 25 million initial capital for set up costs and initial staffing. Further capital dependent on lending targets. Set up as State Bank ala ICC to allow it grow. Then use to entice foreign Bank in to buy modern low cost Business Bank with no legacy loan book. Even presented this at the Dail Finance Sub committee two years ago.But powers that be felt credit guarantee scheme was better. Told them credit guarantee schemes only worked as an add on to a functioning Banking system not as replacement for one.… Read more »
Any bank can function, after splitting off the zombie “investment” arms, and preventing ANY insurance on such activity ever again.
Hamiltonian Credit charters commercial banks to invest in the physical economy – risk assessed knowing no insurance from the same institution.
One pledges the general improvement of the nation-state over generations as collateral. When looked at this way has any other collateral any value at all?
What seems vague is the “product” needing credit, whatever it is.
One needs to look at a credit system not from individual activity, but from a 25-year intent to jump the economic platform. That will generate, products likely not considered in the old platform box-in.
EU cancels Bank stress tests till 2014….?
A.I.B will not allow public to see their liquidity status as it is commercially sensitive and not in the public interest…News Today From The Central Bank…Nuala O somebody or other..! Irish second name…
I don’t think such a Bank exists or that possibility will materialise. . I don’t think there is not even good will among multimillionaires entrepreneurs and celebrities that could help, but prefer to put their spear billions in hedge funds, and other speculative investment, rather than do something of the kind. . Western civilization is not only economically bankrupt, but morally as well, despite all the rhetoric about God, Freedom and Democracy. Our social and economic model is obsolete. . We are living under corporative and banking fascism. . We are heading for the mother of all crashes! . May… Read more »
Hi David. Ask your friend to have a look at https://www.linkedfinance.com
It’s an online crowd-funding inititiative designed to assist small enterprises secure loans that the banks won’t provide.
It seems to be working well for profitable companies whose main hurdle is securing a loan to grow.
Banks can’t hide there balance sheets long term,it’s like sh-it it rises to the top.
For every new job there’s An old job lost , front line news is not the full story how many jobs are lost and hide in the bottom of the news pile.
[…] new banking licences should be looked at as some sort of new thinking on the matter of spending: Wanted: smart new bank that gives us the credit we’re due | David McWilliams So where is the opportunity? There is an enormous opportunity for a new bank to come into Ireland […]
Morning
Regarding the ESRI, I must admit I share the scepticism of the man from Politics.ie above. This week alone they produced research on the generational divide which we’ve been banging on about here for years. This is not research its just a lazy, after-the-event form of workfare for people with worthless PHds.
Best
David
The “new” government are now behaving like the old one.
Political strokes.
Expensive junkets.
Incompetence.
Obedient to Brussels, and pleasing to the “unsecured” bondholders.
Jobs for the party supporters, relatives, pals.
And now we have the Minister for Justice knowing minutae about an opposition TD, when it was not recorded by the gardai’s incident recording system. And using it to put the said opposition TD in his place.
This is like the days when CJH was running the country.
And, unlike in Britain, nobody ever gets sacked/forced to resign.
The whole system is this country must collapse . Money in and far more money out as time is turning full circle it stands to reason the money has to run out. The good times that are still rolling for a large segment of the people who are working and who have retired,the said mention people where and are on top pay , top lump sums,top pensions. This country is acting like a country that’s 100 times it’s size. It stands to reason the whole system that stinks to high heaven will simply run out of cash . When this… Read more »
David
A good number of articles on this blog past and present in one way or another come down to money.
The say money makes the world go round or our country go round.
Would you agree that in the not to distance future,Ireland is going to start to run out of money.
It is fact that Ireland needs to borrow a lot to keep the lights on.
When do you think the lights will go out.
Even in boom time could we afford the wages ,pensions,lump sums,hand shakes and
The index link pensions.
‘Public Self-Issued Credit And Public Self-Governance’ Solution. ‘Valun’ (‘value of unit’) money, as proposed by E.C.Riegel in the 1930’s/40’s (please, Bonbon don’t reply with an ‘ad hominem’ reply) is the only logical and humane MONETARTY SYSTEM that offers a profound, positive solution. I ultimately believe that society will adopt these structures and also his views on self-public POLITICAL SYSTEM, (with or without E.C.Riegel his ideas are ultimately the most logical ‘bleedingly obvious’ when you delve through all the alternatives ), because once aired they are impossible to ignore. Unfortunately for him he advanced his ideas long before technology existed to… Read more »
U.S. authorities seize accounts of major Bitcoin operator.
and Loads-a Bill’s – Mr. Gates is now the richest man in the world poor Carlos Slim how will he manage
I wonder id Bill is interested in up a dumb bank in Dublin
Avoid wall street and your country will grow
David, It seems to me that all your proposing is to add more banks to an already decrepit system. It’s the dept based monetary system as a whole that is the problem. We need to revolutionise our entire monetary system and not just do a few small tweaks and adjustments to a system that is already deeply flawed. Banks are private businesses and like all businesses their #1 priority is to maximize their own profits. Isn’t there a massive conflict of interest in allowing banks to be the creators of money and then getting to decide which part of the… Read more »
Why did DMcW choose his theme on the The 80th Anniversary of Glass-Steagall: The American Principle of Progress ?
May 16 is the 80th anniversary of the law that taught Wall Street a lesson they never forgot. A lesson we need to teach again across the entire transatlantic disaster zone and the U.S.E.
Then FDR re-chartered the Reconstruction Finance Corp., with Credit Banks for Industry and the New Deal.
So, DMcW, we have a precedent for credit and industry!
Dollar crisis and the coming collapse of US global hegemony
17.05.2013
By Colin Todhunter
http://english.pravda.ru/business/finance/17-05-2013/124594-dollar_crisis-0/
A very revealing story of Microfinance : Obama and Geithner: They’re Not Really Americans Timothy Geithner’s father, Peter F. Geithner, ran the Ford Foundation Microfinance program in Indonesia that paid for Ann Dunham, President Barack Obama’s mother, to do her PhD thesis promoting primitive slave industries for Indonesian villagers instead of industrialization, and they met in person at least once. Peter Geithner later ran the Ford Foundation’s entire Asia program. Are some now promoting primitive industries instead of industrialization in the catastrophe called the “U.S.E” ? It seem this fascist nonsense comes from exactly the same source as the entire… Read more »
The best commentary on economy that Ireland has ever had : NAMA wine lake, has just posted a farewell note. The blog will remain but is closed for new material.
11-May-2013 EU Prepares Grab for Bank Accounts
The German KfW, Reconstruction Credit Agency, ran a worst-case TBTF chain reaction failure scenario, just recently. Widely reported in Focus and elsewhere.
But a coup is now in preparation. The response from the financial oligarchy is the method of Carl Schmitt, “the emergency makes the law”, “legal” apologist for the 1930’s Nazi dictatorship.
Very sad news. NWL provided a wonderful service.
David, I know you think this kind of detail isn’t that important and a good economist to you is one which has the people side of things in mind, moreso than the mechanics. However I’m trying to point this kind of thing out so that you better understand the present system. The ultimate goal is that you’ll start seeing the ill-consequences of the system and see that the simple process by which money is created and destroyed is the root cause of many of our social problems as well as our financial ones. Anyway, the technicality I want to highlight… Read more »