THE BANKER WHO COULDN'T GET A LOAN

Elsworth P. Twaddleworth of Pittsville decided to buy a farm as an investment. Land prices were going up fast because the demand for ethanol was driving up corn prices.

As Executive Vice President of the Pittsville Bank and Trust Company, Elsworth foresaw little difficulty in getting a farm loan for $500,000 or so. On a bright, sunny morning, he entered the bank, whistling cheerily.

Immediately he got a chill. While it was sunny outside, the bank seemed dark, gloomy and forbidding inside. Another bad sign: the Bank President's door was closed. He asked the secretary for an appointment, telling her about his investment opportunity. "Lotsa luck," she mumbled.

Finally he got in to see his boss at noon.

He made his pitch, citing the great opportunity and his impeccable credit record.

The Bank President, looking harried and worried, said, "No sale."

Elsworth was shocked. What had just happened to him?

It seems that the subprime debacle has panicked the bankers. Nobody really knows how bad the situation really is.

Does anybody really understand derivatives if experts like Bear Stearns are losing their shirts? Are the rumors true about the bond rating agencies? Have they collaborated with the issuers of mortgage-backed securities to inflate their values and deflate their risks? Is stock market volatility leading to panic? And what will happen to the economy if everybody's worst nightmare occurs: everybody wanting to sell and nobody wanting to buy? What if the panic spreads from Wall Street to Main Street and there are runs on the banks?

Ben Bernanke, Chairman of the Federal Reserve, did not inject capital into the system to bail out the stockbrokers and speculators. He did not cut the discount rate a whopping half percent to save the hedge fund operators. No, Bernanke is far too worried about inflation to take these actions, which are certain to raise the risk of inflation.

No, he acted because panic had reached the bankers. And the entire banking industry had seized up. Bankers, who in normal circumstances routinely loan money among themselves, stopped lending to other banks. Fearing they could not obtain loans from other banks, bankers began to hoard money. Lending was sharply curtailed. Every banker in American wanted to cushion his reserves against a possible run on deposits.

Why was Bernanke concerned about the banks seizing up?

If the banks stopped lending, the economy itself could seize up. And that would lead to a major financial disaster in the U.S. and around the world, especially in Europe.

Ellsworth won't get his farm loan because his boss is worried about two things: a run on his deposits and the absence of loans from his previously friendly bank sources.

And if Ellsworth can't get a loan, how do you think you would fare if you approached a bank about a mortgage or car loan? And what would happen if you woke up one morning to find that your credit cards had been cancelled?

You can imagine what would happen to the American economy, which runs on consumer purchasing power and debt.

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