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A small-business bubble?

by Paula | 20 May 2009 | permalink | comments
Tags: credit, entrepreneurship

WSJ is reporting a thaw in SBA-backed small business loans, which have evidently seen a pretty significant uptick in secondary market sales. This, in spite of the fact that the SBA has missed deadlines both for getting a new secondary market up and running, and for setting out regulations “on lending to broker-dealers in the secondary market for SBA-backed loans.”

I’m sure this has a lot of people breathing a sigh of relief, but the good Dr. Cornwall throws a wet blanket on the good news:

I see two possible outcomes once the SBA gets its act together. Neither are particularly encouraging and they are not mutually exclusive.

One outcome would be the flood of small business lending that the administration wants. That will inevitably lead to a small business loan bubble that will surely pop sometime in the not too distant future. Too many small businesses will be given loans that they cannot afford. The SBA programs often put social agendas ahead of economic ones, just as we saw with the home loan disaster fueled by government meddling in those markets.

The other possible outcome is that the bureaucratic complexity will bog down SBA programs,adding nonproductive costs to the lending process.

Emphasis mine.

A small-business bubble would be absolutely fucking disastrous. Imagine this: what’s happened with the housing market happens to mom-and-pop businesses, new startups, and small service providers.

Even worse, as the US attempts to get its manufacturing feet underneath it again, a bubble would cause a big bloom of small producers only to see them implode, taking down with them the few existing small manufacturers still in operation.

A small business crash would be a stake through the heart of whatever remains of the US economy after the current crisis finishes its work, as well as through “buy local” and relocalization efforts happening at the community level. It would also crush every last community currency project that depends upon easy conversion to federal reserve notes.

Short of a full-blown transition to gold, silver, and nationwide alternative currencies I don’t see how any small businesses could escape the effects of a small business bubble, even if they did not have any SBA or other loans on their books. This is the crappiest thing I can imagine. Really.

The second (of two) currency alternatives available right now

by Paula | 29 October 2008 | permalink | comments
Tags: credit, currency

• On background: Money as Debt: how the monetary system works

The past few days I’ve been talking about currency alternatives, something I believe is extremely important given the problems with national currencies and extreme difficulties coming down the pike.

In addition to digital gold and digital silver, another non-local option exists that is potentially even more useful given its flexibility. It’s called Ripplepay, and it is quite ingenious.

Ripplepay is not a currency per se. It is a payment system in which users extend each other credit and square up later in whatever form they choose, whether in a national currency, in gold or silver, or through bartering items and services. From the Ripplepay site:

Ripple is a monetary system that makes simple obligations between friends as useful for making payments as regular money.

Normally, if your friend Alice owed you $10, she would have to pay you back before you could make any use of that debt. If you were creative, however, you might be able to pass the debt on to someone else who knew and trusted Alice, in exchange for something you wanted. For example, you might be able to get a book you want from Bob, who also knows Alice, in exchange for letting Alice know that she now owes Bob $10. Instead of money, you used Alice’s IOU to pay Bob. Alice acts as an intermediary between you and Bob.

Ripple does the same thing, only it takes the idea one step further. What happens if you want to get a haircut from Carol, who doesn’t know Alice at all? Your $10 IOU from Alice isn’t useful because Carol being owed money by Alice doesn’t mean anything to Carol. But suppose you had a way to find out that Bob, who knows Alice, also knows Carol. You could talk to Bob and arrange for him to take Alice’s IOU in exchange for giving his own IOU for $10 to Carol. Since Alice owes him exactly what he owes Carol, Bob is even on the deal. Both Alice and Bob act as intermediaries between you and Carol.

And that’s how Ripple works. You create a profile on the system and indicate who you know and how much you trust them by connecting to people by email address and giving them credit limits. Then whenever you want to make a payment to another Ripple user using only friendly obligations, the system finds a chain of intermediaries connecting you to the person you want to pay, and records the payment in each intermediary’s account all the way down the chain. You end up owing one of your “neighbours” on the system, and the payment recipient ends up being owed by one of her neighbours.

In the current economic environment, Ripplepay could potentially overcome commercial credit problems by providing a parallel system in which users grant each other credit, rather than having the whole credit system mediated by banks. My clients, whom the banks are currently forcing through knotholes over just a few thousand dollars, could secure credit to pay me from their friends on the system — people who know their businesses and trust them to repay. I can then use the Ripplepay credits with which my clients have paid me either to purchase goods and services from others in my Ripplepay trust network, or to square up in barter or conversion to national currency.

Ripplepay is a working prototype of the larger Ripple Project, currently under development. There is also a Ripple Users Group set up on Google.

I’ve had an account set up at Ripplepay for a while now, but have never used it. If you’re interested in connecting with me via Ripplepay, email me and we’ll see if we can’t get connected.