Carson’s change was no surprise. Of the Congressmen whose constituents would most be devastated by credit contraction and/or capital system collapse, he would be among the top. He was responding to the true needs of his constituents.

By the way, there has been a palpable surge in crime occurring on the north side of Indianapolis in the last two weeks. If people have no means and/or can’t borrow, they can’t afford to wait to get money to eat or fill their gas tank. The response of the business man who came to my office to request money last week, credit gone, when tranferred to the lowest rungs of the economy will produces equally desperate acts, which is what I believe we are already experiencing.

David, you have no idea. To be fair, I went to business school directly from the Air Force, knew nothing of how most businesses are financed, and in some ways only recently have come to understand.

To summarize, though: Banks make money by taking in deposits and loaning out to finance consumer purchases and business expansion/operation. Some banks are strictly commercial banks, lending money only to businesses, and providing interest to depositors/capital contributors.

Your statement that only unprofitable businesses borrow is absolutely not correct… When you get to businesses/corporations of any size, the reverse is almost true: An optimum profitability for shareholders arises when businesses use a mix of debt and equity.

Think of buying a house and renting it out: If you use the right amount of debt, neither too much nor too little, you can earn enough rent to cover debt payments and build up equity without, say, liquidating your retirement account to make the purchase.

The same is true of any business… if you have a business idea and not enough money to finance it outright (which is the usual case if you are speaking of building a factory, say, or putting together a business that requires a significant inventory), or you have a better use to which you can put the money you do have, you borrow having (in theory) proven to the bank to their satisfaction that your idea will produce a revenue that will cover their payments and earn you a profit in addition.

A good banking partner will carry a businessman through good times and bad…. extend credit when necessary and adjust terms so that the business can remain profitable.

The problem with the credit crisis is that banks become so conservative that they retract credit even on profitable operations and refuse to extend credit for expansion (which always involves risk.) Or they raise cost of borrowing to the degree that a business that was profitable becomes unprofitable. So businesses collapse in a credit crisis, unable to restock inventory, hire a salesman, or pay their workforce because their interest payments come first.

And if banks collapse, they can take the businesses down with them. If National City (for instance) were to collapse, hundreds of businesses could be forced to close their doors.

Think again of your own mortage. You buy a house on a 30 year mortgage with an understanding of what your income will be and the belief that it will be more than sufficient. Over time through borrowing, you earn equity, more profitable than renting.

But suppose the bank doubled your interest rate and suddenly you are cash-flow negative. You lose the house and everything.

The same is true with business. Most large businesses and corporations borrow in some way in order to enhance long term profitability.

Chris, the problem with the Carson analysis is that he voted against the first bill. That was a curious vote–but apparently it was because the bill wasn’t socialist enough. The Senate saw to that.

Yes, profitable businesses often do borrow quite a bit. They usually try to have a line of credit for cash flow purposes. I have not heard that there is widespread canceling of lines of credit, though that could certainly be going on. You are also right that profitable companies often loan for business expansion. The fears were being cast, however, that companies would not be able to meet payroll. If a company is making general/term loans to make payroll they are not in good shape and probably not profitable. If their lines of credit are being revoked, that may be a different matter. But it should also only be a temporary problem.

That being said, there are probably a lot of marginally profitable companies that are being squeezed by a credit freeze. One problem that I have is that I am not convinced that the credit freeze is for legitimate reasons, but rather to convince the government (and the American people) to deliver them cash.

I’ve been out of town for most of the week, but it appears that my house is still here so I guess the thugs haven’t taken over in Homeplace yet.

By the way, David, I do think that is a significant problem in Congress. Too many Congressman come from a background in which they really have virtually no idea how the majority of business in the United States is, and historically has been, accomplished… they only think they know. (Of course, too many on wall street also thought they knew more than they knew.) They tend towards platitudes and ideology, having no true conception of how financial institutional failures could within days reverberate all the way through the economy destroying even profitable, healthy businesses.

Or why Warren Buffett (who surely knows more about American business and economics than any congressman, and whose public spirit is beyond reproach) described the crisis as an economic Pearl Harbor. Buffett employs hundreds of thousands of Americans.

Panic and credit contraction can spread so quickly as to devastate an economy, and render a population jobless and hungry in a heart beat. The role of credit, loaning and paying interest in order to grow business, predates Christianity. To get a sense of this, read the Annals of Imperial Rome by Tacitus. It’s a remarkable parallel… nobles who were invested in each other’s business interests calling in their loans in the midst of business failure and creating a domino effect. Caesar had to intervene and flood the Roman economy with money of his own in order to restore confidence.

In my opinion, the reason the vote changed so drastically was that until Monday, the vast majority of business people assumed that Congress was carrying on its normal baloney but was sophisticated enough to understand that the financial crisis was real and threatened the very foundations of the economy, whether the average American understood what would happen to them or not if collapse occurred. The market plunged when (ideologic) Republicans in the House rejected the rescue, because the value of owning a share of American businesses was itself plummeting. That was a true glimpse of what has been getting called the abyss.

Then businesspeople all over, in large town and in small, who had any understanding of the essential role banks and other financial institutions play, awoke to the fact that Congress didn’t get it… and began making phone calls.

(I don’t think its any coincidence that Mark Souder is the only Republican from Indiana who voted for the package… Of our current crop of Republican Congressman, unless I’m mistaken he is the only one whose family base was business… operating a general store, which would have involved a close banking relationship.)

This situation makes clear the objective reality about the Republican Party… The fiscal and business wing which at one time was the majority has generally fled (diminishing to 17% by some polls), leaving the Party in the hands of ideologic social conservatives who have very little grounding in or understanding of business, but who are now in the majority. From them, we get platitudes, while the economy collapses, credit contracts, purchases dry up, unemployment rises, and a downward spiral begins.

What we have been through is now like a heart attack. It should have been attended to two weeks ago (if not before). The plague of sub-prime debt had broken loose and clogged the arteries, and credit between major business institutions stopped. Like a heart attack, the longer we went without treatment, the more muscle was affected. Unfortunately, our doctors were not trained in medicine, took a popular poll, and tried to withhold treatment.

The bad debt will be bought at discount, but not firesale, and once the economy has stabilized and confidence restored, it will be sold back to investors, possibly (and perhaps even probably) at a profit. We are in for more pain, but we will survive.

The citizens of Muncie should understand that Pence has worked against their economic interests, but there aren’t enough business people left in already-devastated Muncie to explain it to anyone.

By way of a personal example I can now cite as of this afternoon, I conducted my quarterly transfer of a check from a strong financial institution into my business account at my local branch bank today (National City), an act that allows me to cover my office leases, payroll, health plan, and all other expenses for the next quarter. Because of the credit crisis, for the first time in my 5 years of business following this regular procedure, I was informed that my check from a strong financial institution could not be honored for 5 days.

I will be able to make payroll only because a week ago I drew down a line of credit and deposited it into this account precisely because I was concerned that the crisis might prevent the flow of money, all of which belongs to me in a business which is profitable. Had I not drawn down the credit line and placed cash in my account, my two employees (including a single mother of three children)might not have gotten their pay and 9000 Keystone Crossing might not have gotten its rent check in spite of the fact that I am perfectly solvent and a careful manager of cash flow.

I am fascinated with what arrogance the House Republicans presume there is not a genuine crisis. And the response on this blog is like the proverbial queen in Rousseau in being so utterly oblivious of reality: “The people cry for bread? Why let them eat cake!”

Joel, the House Republicans had to be pushed to the understanding that there is crisis. They literally don’t get it.

Electronic debits and credits transferred between banks are the modern equivalent of currency. Government has a role when the system breaks down. My view (of this debate and of the House Republicans) is that they are utterly out of their depth in understanding the peril and the impact. They’ve proposed various meaningless forms of window dressing when the house is burning.

The financial arteries are no less vital than the asphalt ones on which trade flows. Why don’t we leave it to the “free market” to build highways? When there’s a massive auto accident and traffic grinds to a stop, why don’t we leave it to the “free market” to remove the bodies, clear the wreckage, establish the rules, and get traffic moving again?

Help me with what you see as the practical and constitutional difference.

It isn’t a perfect analogy, but the government in a mass auto wreck doesn’t have to ask anybody’s permission to maneuver wrecked cars off the road.

Government entities regularly purchase private assets… Pension plans regularly invest in private stocks and bonds… And purchasing the distressed assets is no less of an investment….

I’m in a rush, so this is cursory… I don’t think there is any serious constitutional question at stake…. but you might find your answer in Section 8 among other places… wedged into “the Power to lay and collect taxes… to pay the debts and provide for the common Defense and general Welfare of the United States…… To borrow Money on the credit of the United States… To establish uniform lawas on the Subject of Bankruptcies… To coin money and regulate the value thereof…. To make all laws which shall be necessary and proper for carrying into execution the foregoing powers… ” and it is in spirit of the general welfare language of the pre-amble and so far as I can tell… in contradiction to no language that I can find.

Regarding Pence/Burton… theirs was a knee-jerk, barely concede a problem, offer a red-herring inadequate solution, tactic in order to obstruct the solution whose theory and necessity they didn’t understand. They didn’t stop to inquire, but launched into instant opposition.

(By the way, Joel, the constitutional language on equal protection and religious freedom for gay citizens is clear nationally, and virtually explicit in the Indiana constitution. The social conservative concern for the Constitution seems highly selective to me. It undermines the credibility of the far right. Only libertarians might have at a stretch have a consistent basis on which to oppose this government action to rescue our markets.)

Chris, your argument presumes that this $700 billion (nay $850 billion) bailout will re-open lines of credit. That’s a huge assumption. It’s a “hail mary” that the American people should not have been forced to make. Why should we put our trust in the Wall Street banksters (Henry Paulson being one of them) who have proven themselves to be crooks and swindlers of the slimiest order. My bets are with Mike Whitney, writing in Counterpunch where he argues…

“…the $700 billion is just part of a massive ‘pump and dump’ scheme engineered with the tacit approval of the US Treasury and the Federal Reserve. Once the banksters have offloaded their fraudulent securities and crappy paper on Uncle Sam, they will do whatever they need to do to pad the bottom line and drive their stocks up. That means they will shovel capital into hard assets, foreign currencies, gold, interest rate swaps, carry trade swindles, and Swiss bank accounts. The notion that they will recapitalize so they can provide loans to US consumers and businesses in a slumping economy is a pipedream.”

I won’t argue on the various conservatives that claimed that there was a problem but the Paulson plan was not the way to go. You say they did not admit a problem or only minimally admitted it while they were claiming a problem that required quick action. I think your previous opinions on these individuals prevent you from seeing their positions for what they are. Oh well.

Regarding the Constitution, your arguments are very weak. Most of the items that you cite are regarding raising of revenues. If that is what we decide this bill was, then we need to void it since it began in the Senate and Article 1 Section 7 prevents that. But clearly this was a SPENDING bill. So your argument would rest on the concept of providing for the “general Welfare” clause.

On one hand I can admit that at least as it has been portrayed there is a sense to which that would be true of this situation. On the other hand, we see that it is really specific welfare rather than general. Why is the government negotiating leveraged buyouts between CitiBank and Wachovia and working against a purely free market deal (that appears to be a better deal for the Wachovia stockholders) between Wells Fargo and Wachovia? Is this deal helpful for people like Warren Buffett who has cash and is trying to make the best deals that he can for Berkshire Hathaway? No, this does not benefit those who are not in debt and have cash.

I repeat the 10th Amendment since it seems to be the most forgotten part of the Constitution:

The powers not delegated to the United States by the Constitution, nor prohibited by it to the States, are reserved to the States respectively, or to the people.

Yes, I know we have violated the Amendment thousands of times. But each one hurts it.

Even if I were to concede that this were to get by the “general Welfare” clause, the next issue is whether or not this is desirable. Do we really want the largest real estate agent in the U.S. to be the Federal Government? Do we want to cede to the Federal Government the right to set prices of properties and interest rates? Both of those rights are reportedly in the plan passed by Congress. This is a can of worms situation here. Will we be able to reign in the powers we have given to the government in a time of “crisis” when the crisis is over?

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