Since just about every other blogger under the sun has weighed in on the pending financial meltdown that an insolvent Fannie Mae or Freddie Mac would create in the global credit markets - I feel compelled to throw my hat in the ring as well (what better thing to do when getting buzzed on caffeine at Caribou coffee on a Friday night?).
Many of you are probably familiar with the “too big to fail” tag that has been attached to some large financial institutions in times of trouble, most recently Bear Stearns. This tag has been thrown on the Government Sponsored Entities Fannie Mae and Freddie Mac in recent days as their stock values have plummeted and their financial woes have raised eyebrows across the world. “Too big to fail” means that the government should step in and prevent an institution from failing so as to preserve the greater good of the public.
I can tell you first hand, from an entrepreneur’s standpoint, that having the credit markets get worse right now would be bad news for me and a lot of my brethren. I know that the age-old argument of government interference in private enterprise is alive and well here, but I can’t help but take a look at what the implications would be if financing real estate transactions slowed down further or the capital markets failed to function in getting companies from small to large the money they need to work and grow.
Our economy has become so overly dependent upon credit and liquidity to even operatethat things will really come to a standstill if big shocks occur. The speed with which markets react to information is stunning and it wouldn’t take long for banks and credit card companies to put the screws on small business owners - squeezing profits and impeding growth.
Much of the commentary about this situation right now is focused on big companies and Wall Street banks. The entrepreneur is left out of the discussion but not out of the equation. I think that something should be done from a cooperation standpoint between the governments and other institutions that are close to Fannie and Freddie. We can’t afford to go ‘cold turkey’ in changing our credit dependency overnight - we need to enter rehab first and work it out of our system.
I am hoping and praying for sanity during this whole mess. Though I am confident that things will work themselves out over the long term, the short term will mean pain for somebody, portfolio companies, pension funds, investors, etc.
We can only look forward and learn from what is going on right now and eliminate the ‘irrational exhuberence’ that has once again penalized investors and, most likely taxpayers, again.
“I can calculate the movements of heavenly bodies but not the madness of men.”
Sir Isaac Newton
