In response to the worst financial crisis in the United States since the Great Depression, the state is going to use $700 billion to purchase the toxic mortgage-backed securities from various financial institutions in order to find the bottom of the market.
But will it work?
Spending $200 billion and setting up a Resolution Trust Corp (RTC) helped the US economy to weather the financial crisis of 1991 but led to a 2-year recession that battered businesses on the main street. During the great depression where the employment rate reached 25 percent, the federal government reacted late, worsening the situation.
Fortunately, the short-term effects on the economy will bottom out property prices, giving banks a chance to clean the skeletons out of their closets. With the fresh start, banks can increase their market capitalization, boost the value of mark to market assets and restore the confidence in the financial system.
During the short-term, the US will outpace other developed world economies, strengthening the dollar and lowering the cost of imports including oil. Though in the medium-term, the exorbitant US fiscal deficit will increase inflation since the Fed will not be able to increase the interest rates for some time. Economist Hyman Minsky discusses this phenomenon in his work Stabilizing an Unstable Economy.
How will it affect the small businesses that are already suffering from a “recession mindset”?
Small businesses should see credit availability increase in the short- to medium- term but interest rates rise from inflation over the next 6 to 12 months. Business owners should acquire credit now at fixed interest rates to secure a low interest rate. Once the inflation rises, the real interest will become negative, reducing the cost of capital and increasing the competitive position of the business.
As the crisis develops, we’ll keep you posted on how to safeguard your business and work the market to your advantage.
This article was contributed by a Biz2Credit case manager. Case managers are trained to structure the best credit solution for businesses in all types of industry segments, geographies and life cycles. To contact a case manager e-mail firstname.lastname@example.org.