Put plainly, banks in the U.S. have long since been eclipsed by alternative sources of finance when it comes to providing companies with credit. Putting it in numeric terms in the present, in their excellent new book Freedom Manifesto Steve Forbes and Elizabeth Ames write that U.S. companies have $1.2 trillion in bank loans outstanding, whereas their European counterparts have over $6 trillion. Contrary to popular opinion, the failure of one or many banks in 2008 would not have led to a collapse in credit for solvent companies. To understand why, we must consider what economists refer to as the “substitution effect.” Basically, shortages of anything are often made up for by new market entrants. Banks are no different in this regard. Back in the summer of 2010, with its small-business clientele suffering from tighter than normal credit, Walmart’s Sam’s Club subsidiary announced its willingness to provide its customers with $25,000 lines of credit. Walmart has for years tried to get into banking, absurd regulations about new entrants arguably kept it from purchasing some of the insolvent banks in ’08, but even without a banking charter, Walmart was able offer up credit at a time when banks weren’t able to. Much the same is occurring now at Amazon.com. Traditional banks remain careful about lending, but Amazon, flush with cash, is eagerly substituting for the banks. Through its Amazon Capital Services subsidiary, Amazon is helping the sellers on its website to access credit that is in short supply at the moment from banks. Getting into specifics, the Wall Street Journal recently reported on Lisa Zerr, owner of Yankee Toy Box, and her urgent need to secure credit in order to upgrade her inventory ahead of the holiday shopping season. Yankee Toy Box does a lot of business on Amazon, and she’s since borrowed from Capital Services $38,000 in July, and then $13,000 last month. It should be stressed that Amazon is one of myriad companies that uses its balance sheet to provide banking services to customers. Not a traditional bank, it acts as a bank, and is a substitute for a limping sector.
Monday, October 15, 2012
"Amazon.com Exposes The Fraudulent Nature Of The 2008 Bank Bailouts." Interesting point about "substitution" in the economy from Forbes - assuming, of course, that non-market forces, i.e., the government, don't muck things up: