Saturday, October 4, 2008

An Explanation of the Crisis

Dan Edelen just posted an excellent explanation of the economic crisis.  It was written by an economist friend of his, and it explains more about why the meltdown on Wall Street, and the subsequent tightening of credit, could have a huge impact on Main Street than anything else I've read.
Our economy uses credit so systematically and it is so much at the core of our economic effectiveness, that to constrain it just the littlest bit sends shock waves throughout the whole system. The businesses that are right on the edge—the ones that need to borrow money even for a day or two to cover the cost of inventory and make payments to manufacturers before inventory is sold—are in a very precarious position. If they can’t get credit they’ll get caught between paying for inventory and paying for payroll, for example. That’s a tough spot…if you don’t pay for the inventory on time you get no more and you’re out of business. If you don’t pay the employees, they all quit and/or the news gets out and your suppliers dry up. Any way, you’re out of business.

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