Banking, the Economy and Frost

I was listening to Jackie Lavin speaking to Dave Fanning on the radio recently. The interview was the usual dose of big bad banks/Ssangyong good/good side out routine that Bill and Jackie have been spinning for the last few years since their ambitions exceeded their income. Bill and Jackie have made no secret of their displeasure at how they were treated by the banks and Jackie made the point that their assets weren’t put into Receivership until 2012, when the worst of the recession was over, implying that it was needless as having survived until then, they could have pulled through if they were only given the time.

Regardless of the merits or otherwise of Jackie’s argument it put me thinking about the viability of advancing large loans to a business over a term as short as 15 years (which is the standard commercial mortgage term in most banks). I can’t recall who it was, but even more recently I heard a businessman comment that his business had been in existence for around 90 years and he wanted to know what was the relevance or logic to advancing money to him for 15 years — why was this number so critical to successful financing.

Given that we know that the economy is cyclical it could be argued that advancing finance on a strict 15 year term is setting a business up for a fall. If we accept (and I think most people would) that the last big recession ended in 1983 and this one began in 2008, the 25 years in between was a fairly small window for a business to take out a commercial mortgage and repay it, remembering that many businesses were badly affected in the interim by the dot com bust of 1999/2001.

What to do? Banks advance loans to some sectors (farmers for example and other seasonal enterprises) on repayment schedules which are designed to match cashflow. A tillage farmer will rarely be asked to repay his loans on a 12 month repayment schedule because for some of the year he will have only expenses and no turnover. Having one or two larger repayments on dates just after produce is harvested makes more sense. Applying this to the bigger picture would mean that instead of advancing commercial loans for 15 years, why not advance them for say 30 years but with a built in option to reduce or even cease repayments for up to say 8 years, if the business is affected by an external factor, the passing of which will return it to profitability, as is the case for many businesses affected by the current recession. Employment and consumption might not be as badly affected as was the case in recent years, thus giving the economy a fighting chance of a quicker recovery when conditions improve.

A friend of mine, who probably wouldn’t want me to credit him, has a theory about recessions. He says that recessions are to the economy what frost is to farming. When you have been planting crops in a field for a period, land can be invaded by weeds which threaten indigenous plant and animal life and reduce yields. Frost kills off these weeds and when it is gone, whatever survives thrives better than before. During a boom new entrants to trades and professions reduce the share of wallet for everyone in that sector and reduce yields, and the subsequent recession kills off the weakest after which the fittest thrive. It’s a somewhat cruel analogy as from a human perspective recessions are damaging to individuals and society — we only have to look around us to see how in many cases the weakest have borne an unfair share of the burden of turning the country’s finances around, due to our paymasters in Europe’s decisive bias towards trickle-down economics.

The world has a mysterious way of regulating itself and you would wonder whether any effort by us to rid ourselves of the effects of recession would be offset by some other factor not yet known to us. Perhaps the answer is that we all have to make do with a smaller yield for this to work.

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