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Where did all the money go?

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POSTED: February 20, 2009 10:38 a.m.
Regarding the cash infusions that Congress approved last fall to shore up the U.S. banking industry, one thing is important to remember. That is that it will take time for those cash infusions to work their way through the lending system and get “into the streets.”
If, as I heard on a radio news story recently, some banks are taking time to more fully investigate loan applications before lending the funds, bully for them! If they had done their homework in years past, we wouldn’t be facing the write-downs for uncollectible loans on over-valued properties to begin with.
Also, in the world of commercial lending, there is a “lead-time” factor that must be considered before results can be seen. When I was in the wholesale business some years ago, it usually took a year or more before interest rate changes on business loans would begin to produce effects –– either good ones, if long-term loan rates went down, or bad ones, if long-term loan rates went up.
Much of our business was seasonal, meaning our firm bought in the spring or summer for that fall’s sales; or in the fall or winter for next spring’s sales. “Extended dating” terms we got from our suppliers were passed along to our retail customers. So until we saw collections on sales come in, later in the year, we never knew what results our pre-season purchasing would have. A lot of that depended on external factors such as weather and current interest rates.
I was somewhat dismayed to see former Federal Reserve banker Paul Volcker among the Obama appointments, as he was in charge of the Fed on Jimmy Carter’s watch, and caused interest rates to zoom from 6.75 percent in the fall of 1977 or thereabouts, to 20.5 percent about two years later. This had a devastating effect on commercial profits in many industries, and on its own nearly killed the construction industry. It killed my family’s business (begun 1896) and many of our retail customers across Georgia, South Carolina and Florida. Savannah is much poorer for those business losses.
This led to Ronald Reagan’s famous pre-election quip that adding the ruinously high interest rates to the equally awful inflation rate combined to form the devastating “misery index.” That was part of the reason the voters turned down Jimmy Carter’s bid for a second term and elected Mr. Reagan president instead. As it was, it took him a full two years to be able to begin to turn things around. The ship of state moves slowly.
We should not rush to judgment before the results of the banking infusion has had time to work. This may take a year or more.

Semmes lives in Liberty County’s Woodland Lakes community and works in Savannah.
 

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