Why the Bailout Will Fail
I hate to be pessimistic, but the United States Senators running for the Presidency of the United States are not businessmen, and never have been, and thus, the bailout will fail. For example, during the debate Tuesday night, Senator McCain claimed he was in favor of the bailout so there could be sources of credit for businesses, especially small businesses, so that they could borrow to make payroll. Senator Obama did not disagree.
Line up every banker and venture capitalist that wants to lend money to a business so it can make payroll. It will be a very short line. Usually, when any business is borrowing to make payroll, assuming such a thing can be done even in the best of times, the business is doomed. Apparently, both of our major party candidates will spend tax dollars even on the futile, or else, they do not know where the line of futility lies. I do not know which is more worrisome. It was like a scene from Doctor Strangelove, only about money.
Of course, Tom Brokaw is not a businessman. He did not remark on the error, if it was one. The studio audience had been sworn to silence, or else, were picked because they would not know enough to know better. Either way, the silence was “golden.”
There are situations where a company is under contract to perform a complex and lengthy task. The company will get full payment when the task is complete to the customer’s satisfaction. Sometimes there are “progress payments,” made at certain key milestones in the completion of the project. Either way, the company has to pay staff and acquire materials long before it can expect payment. Some companies borrow money or have lines of credit available to handle the gap between labor and material outlay and customer payment. I think this situation may be what McCain had in mind.
While I hope Mr. Bates is right, small businesses that exist on accrual rather than actual cash flow, and bridge the gap with debt, would seem to be the most at risk in a recession. I would have to leave the proof or disparagement of that to economists. It was the first Presidential debate I can recall, in any event, where both candidates left me wondering if there might be a third choice.
We welcome your opinion and insights on our new Bailout Report at http://server.uslaw.com/bailout. The conversation is likely to be more lively with you a part of it. Thanks..
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