Remember the road that was paved with good intentions? Well, that's where we are with the economy. There's no lack of ability to determine what the problems are with the economy, but there's a significant lack of ability to find an appropriate solution.
We are in the process of solving the employment crisis, the financial market crisis, the auto crisis, the climate crisis, the healthcare crisis, and the list goes on. The problem is that we are creating more uncertainty than confidence in the minds of business, consumers and those owning our debt.
The underlying disease that keeps the patient in intensive care is uncertainty. It keeps the caregivers from identifying a course of action that will fit the current circumstances. That results in the behavior that reduces risk in all areas that affect the patient — in this case, the U.S. economy.
Uncertainty in the eyes of the consumer comes from employment opportunities, which are diminished due to the uncertainty facing financial institutions. Small businesses are the key to increasing employment. They are the source for more full-time and part-time employment than the combined totals of the largest U.S. corporations; however, these businesses have operating characteristics that lead to a greater likelihood of going out of business than larger corporations.
For a small business to operate, it needs access to working capital to bridge difficult times. The need for funds could be for payroll, operating supplies or even rent. Whatever the source for the need, it is real, usually immediate and requires a line of credit or a responsive lender that can make the funds transfer on an as-needed basis. Right now, it is more difficult than in the past for the small business owner to get access to those funds.
The reason is the uncertainty faced by the lender, usually a hometown bank that has been conducting this type of business for years. That lender now has to create a portfolio of loans that have a higher incidence of stable clients than those that are more prone to failure. If the lender does not do this, it faces the now higher scrutiny of the regulatory agency that guarantees depositors' funds. Nothing like having the regulators show up to review your books. As a result, loans are not as forthcoming to the group that could provide the greatest increase in employment.
The consumer looks at the inability of employment to be increased and decides that it would be best if they put off major purchases for an indefinite period. They also substitute less expensive goods, disrupting a supply chain that had been rather robust until the recession dragged on. Adding more expense to the consumer through wildly fluctuating pump prices for gas further reduces the willingness to commit to the purchase of goods that need to be financed.
Another drag on the economy is the increased uncertainty in the bond and equity markets. The drop in the Dow Jones Industrial Average from 14,000 to less than 8,000 was an eye-opener for many seeking to fund retirement. Guess who's staying in the labor pool due to the uncertainty of available funds for retirement? The bond holders look to rising interest rates that will be needed to pay for the rising debt at the Federal level, thus driving down yields for existing bondholders.
The solution is not more uncertainty. Cooler heads need to prevail so the pavement of good intentions does not yield to the size of the potholes we are now experiencing.
