Wall Street vs. Main Street
Inc. Magazine's Patrick Sauer interviews Eric Janszen and a panel of experts on the credit crisis
The recent turmoil involving Lehman Brothers, Merrill Lynch, and AIG have cost the economy billions of dollars, led to thousands of layoffs, and conjured up comparisons to the Great Depression. But how will the crisis impact entrepreneurs? The answer might surprise you.
Does a slumping economy mean it's time for entrepreneurs to panic? To gauge what impact the crisis on Wall Street will have on Main Street, we assembled a panel of business owners, money managers, and finance gurus to offer their take on the real ramifications. The outlook, it seems, may not be as grim as you think. Sure, for the foreseeable future, money is going to be harder to come by, but, as with every business cycle, the strongest companies will survive. And it never hurts to have cash on hand.
Roughly a third of small businesses are backed by home equity loans. What will the effects of the mortgage crisis be?
Eric Janszen, owner of iTulip, a finance and economics website, and the former CEO of Bluesocket and AutoCell, and managing director of Osborn Capital: It's going to affect them badly. Banks have already reduced the traditional means of credit and replaced them with revolving credit. Credit cards are more profitable and home equity loans are no longer economical.
Will there be something of a small-business correction?
Janszen: The economy is contracting, lending standards are tightening and banks want to increase deposits, so things are tough. The economy is evolving, though, and I see it going away from what I call the FIRE economy [finance, insurance, and real estate] back to an entrepreneurial investment economy where owners make products and invest the profits back into the companies. Good old-fashioned capitalism. Unfortunately, I think it will be a couple of tough years rebuilding the real economy.
What are your general feelings about government bailouts?
Janszen: They have to be separated on a case-by-case basis. Bear Sterns posed significant financial risk because of derivatives and it couldn't be allowed to fail. About $1 trillion of Fannie and Freddie (agency debt) is owned by China, so if we let that fall, besides the political ramifications, it could have sent inflation to 10 percent (actually, EJ said mortgage rates would go to 10%). A huge portion of Lehman was owned by Asian banks, so that's not our problem. I'm philosophically opposed to bailouts, but pragmatically, what are you going to do? I hate when the federal government gets in the way of innovation, like the $25 billion the auto industry loan is probably going to get. A bailout like that doesn't allow entrepreneurs to compete with GM and Ford on the next generation of efficient vehicles we desperately need. more...