Financial Reform Must Focus on Credit Availability

The people that I speak with who are really worried about the current state of things are those who are retired or are just about to retire. Even if you look at the most conservative of stocks that yield dividends, the vast majority of blue-chip stocks have been very hard-hit by the current bear market.

Also, if you are relying on income from your investments, your options are becoming very limited. Yields are falling on bonds and Treasuries. Dividend-yielding financial stocks are still on very shaky ground. And many are worried that even their cash reserves are a risk (or could get tied up for a while) in a banking failure.

There’s no doubt in my mind that the stock market and economy have a long way to go before any meaningful recovery. In the very near term, we could get some sort of rally in stocks, as the market looks to be a little oversold in my mind. Anything is possible in an environment where confidence is so fragile.

The one area of the capital markets that could derail the Main Street economy going forward is corporate credit. If the banks can’t get easy terms to borrow money, then people can’t get easy terms to borrow money. Just like our use of oil, the economy relies a lot on credit just to do its daily business.

My worry is that a company in the manufacturing industry might have difficulty selling its account receivables to meet its payroll or to finance a new piece of equipment. Never forget that bank lending institutions are not your friends. In times where credit is tight, sometimes a bank will come up with directives, like they’re no longer lending to any business in the auto-parts industry. What do you do, then, if you’re a small business in auto parts? It’s happened before and we’re seeing some signs that this is happening again.

The availability of credit has to be at the top of the agenda for any financial reform going forward. If a business can’t borrow to meet its daily operating needs, then the economy is dead.