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Chadwick: Government Camel in Banking's Tent

The camel’s nose is under the tent, but at least there is a tent.

Or put another way, beggars can’t be choosers. Over the last few weeks, the world witnessed the impending annihilation of the financial markets worldwide with grave ramifications for capitalism globally. It was scary. And then help came in the form of government intervention through a massive injection of equity capital into the banks. The U.K. led the way, and once it had taken that giant step, the U.S. had no choice but to follow suit.

Europe is used to having the government involved in the private sector. Socialism is a respected economic option there, and the resulting paltry private sector growth (Euro sclerosis is what I like to call it) is the apparently acceptable tradeoff. But American capitalism eschews government interference and despises the notion of government bureaucrats meddling in private sector decision-making. However, with credit and lending literally frozen worldwide in the last week, we in this country had to swallow our pride and give in to Big Brother.

But heed a warning — this giant ‘shot in the arm’ will be effective if, and only if, the banks get out there and start lending again. There are hundreds of thousands of good, solid, reliable enterprises in this country (and around the world in fact) that need a steady flow of capital to run their business – book stores, restaurants, house-builders (YES, even house-builders!), doctors with payrolls, electricians, gardeners and on and on!! They are the lifeblood of our economy. They constitute more than half of the people who work in our country. They can save our economy, but only if they are not strangled to death by the banking system’s refusal to give them access to money.

Many people working in the financial industry have indeed lost their jobs and a serious recession is already underway for that sector of the economy. The housing industry, too, is now in the throes of a recession unlike any experienced by all but our (now deceased) grandparents. However, there is no need for the recession in the housing and financial sectors to bring down the rest of the entire economy. And it won’t if the banks keep their part of the bargain that is implicit in the massive Government provided equity infusion by doing the work that banks for millennia have done — lending capital to the private sector of the economy.

The world is too financially leveraged — everyone now knows that — and the only long term solution for that condition is to reduce spending while paying down debt. This does not augur well for GDP growth or for corporate profits over the next year or two or possibly even three or more. But if the banks reject the inclination to hoard their new-found capital and instead open their pocketbooks and lend, they can indeed mitigate and even reverse the economic damage currently being wrought by fear.

The stock and bond markets will tell us if the banks are keeping their part of the bargain. If loan activity picks up and money starts flowing again, the recession in which we find ourselves now will slowly but surely reverse course. The equity market is a leading indicator of economic activity; so long before the economy actually gains momentum again, stocks will tell us what will be happening.

Keep your own eyes open too. Pay attention to all the information at your fingertips – watch television, listen to the radio, read newspapers and peruse the internet. Educate yourself. Listen to Warren Buffet. Listen to Jack Welch. Talk to the merchants in your city or town. Let THEM tell you if the banks are helping or hurting. When what you hear gives you confidence that the economy is being supported by the banks and that the housing crisis is getting resolved, then you can feel more assured about a positive outlook for the stock market.

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Patricia W. Chadwick has had more than 35 years of investment experience. She is the founder and president of Ravengate Partners LLC, a consulting firm that provides advice on financial markets and global economics.