You don’t have to be a Darwinist to believe in natural selection…
As a young man growing up in the heart of the Bible belt – a southern kid raised just outside of Atlanta, I was brought up in a fundamentally conservative Christian home. The values and beliefs have stuck with me through decades including a natural love for order and design. I view our world through a lense that accepts our universe as the orderly creation of a truly amazing God. And yet, with this fundamental belief, I still don’t have a problem with the concept of natural selection. Honestly, this process makes perfect sense in so many facets of our world.
Now this article isn’t meant to debate the subtleties between creationism and evolution – I’m simply not qualified to debate the issue. Instead, I’m drawing a parallel between the natural order of our tangible world and the reflecton within the business world. In a capitalistic society, there is a “survival of the fittest” concept that actually makes for a stronger and more creative economy over the long-run. This doesn’t mean an economy won’t experience growing pains – and for those who find themselves in a different category than the “fittest” the concept can be brutal. But the process of weeding out these uncompetitive businesses is actually a positive step for the general public.
The Problem of Over-Population
Some of my fondest childhood memories are campouts with my Dad on the banks of Lake Allatoona. We would often steel away on a Fiday afternoon up to our favorite campsite at Red Top Mountain and spend the majority of the weekend fishing and hiking through the woods. Since deer were protected in the national park, we were always sure to see a doe followed by a few spotted fawns and occasionally if we were lucky there would be a nice buck lurking in the shadows.
However, while the state park was a haven for deer with very few natural (or un-natural) predators, there were a few summers when the deer population got so large that it outgrew the resources available to feed all the animals. It didn’t take too many seasons for the deer to become malnourished and a danger to themselves. In the end, the Department of Parks and Recreation had to temporarily lift the ban on hunting in order to thin out the deer population and create a more healthy environment.
The parallel is clear for the US banking industry. For years, our policy decisions have led to great profit opportunities for small, medium and large banks. But eventually the industry grew so large that it became necessary (and profitable) to use excessive leverage and risk in order to turn out even bigger profits. At the height of the banking bubble, many institutions were walking around malnourished with low levels of capitalization but no natural predators.
The proliferation was clearly unhealthy and left the banks vulnerable to any weakening conditions. So in the last 18 months as reality has re-entered the market, quite a few weakened institutions have had to face the facts and either close up shop or join forces with a stronger partner. The process appears harsh and drastic, but the reality is that as we allow natural selection to pick off the weaker players, a much stronger banking industry – and by extension a stronger economy will emerge.
This week the attention has been on CIT group which is the primary lender of choice to many small and mid-sized businesses. As I write, it is unclear whether the company will get an 11th hour capital injection from bondholders, but it is clear that the government is not interested in bailing out the troubled bank. The hunting ban has been lifted. CIT is a deer in the hunter’s scope and will likely be picked off.
An Argument for Small Businesses
One of the best arguments against allowing CIT to fail is the pressure that many small businesses would face without access to their CIT credit lines. For instance, an apparel retail company counts on a line of credit from CIT to buy next season’s inventory. While CIT will likely be taken over by another well-capitalized bank, this new institution has no requirement to honor and fund existing credit lines. The retailer may be up the creek when it comes to buying the product line which is supposed to make his Christmas.
But quite honestly, even small businesses should be better prepared for such an event. Part of any competitive business strategy includes negotiating for the best terms with suppliers, bankers, property managers and a number of other relationships. It seems natural to expect that issues could come up between my business and the bank and so I should have another plan of attack in case trouble brews.
As a small business owner myself (Sound Counsel Investment Advisors), I have a solid agreement with a custodian who holds the majority of my clients assets. I reached this arrangement because of the quality trading platform, the low commission costs, and the quality of service I receive. However, if this company were to disappoint me through a change in rates, poor technology, or a breakdown in customer service – there is almost no limit to the number of other custodians I could turn to with my business.
Part of the problem with CIT is that customers have believed that the bank will always be able to serve their needs. While of course deposit accounts are protected by the FDIC (within the standard limits), there is no guarantee that the company will always be able to serve its customers lending needs. I find it disappointing that the current administration has made so many decisions that fly in the face of free markets. And while the current administration isn’t the only one who has caused damage to our economy, it does not appear that we are turning in the right direction of allowing free markets to “naturally select” the winners and losers of this economic crisis.
The decision to not bail out CIT is one of the first positive steps I have seen and I applaud the governments willingness to allow the scenario to play itself out relatively untouched. While there will be disappointment and some difficulties for many businesses as a result of the likely bankrputcy, the overall economy will be strengthened in time through the process of natural selection.
FD: Author does not have a position in CIT
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July 18th, 2009 at 12:32 pm
Whether you support government support for CIT or not, whether on practical or philosophical grounds, the fact is that many very well-managed, successful small and independent retailers depend on CIT for financing, not out of irresponsible decisions, but out of necessity. Whatever one may think about this issue, a CIT failure would have very negative consequences for a broad range of small businesses, businesses that employee many, many people.