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Monday, October 15, 2012

Amazon Exposes Lie About Bank Bailouts

From Forbes (h/t Instapundit):
A regular response from bank bailout apologists back in 2008 was that absent the use of taxpayer money to prop them up, lending would freeze and businesses would collapse. The bailouts were necessary, according to the apologists, because our much-admired commercial sector is and was reliant on bank credit.

The above arguments were naturally ridiculous. As Thomas Woods noted in his book Meltdown, banks in 2008 only accounted for 20% of corporate lending. Furthermore, going back 100 years to the early part of the 20th century, according to G. Edward Griffin’s very uneven (and often conspiratorial) book The Creature from Jekyll Island, 70%+ of lending to corporations was of the corporation-to-corporation variety.

Put plainly, banks in the U.S. have long since been eclipsed by alternative sources of finance when it comes to providing companies with credit. Putting it in numeric terms in the present, in their excellent new book Freedom Manifesto Steve Forbes and Elizabeth Ames write that U.S. companies have $1.2 trillion in bank loans outstanding, whereas their European counterparts have over $6 trillion. Contrary to popular opinion, the failure of one or many banks in 2008 would not have led to a collapse in credit for solvent companies.

To understand why, we must consider what economists refer to as the “substitution effect.” Basically, shortages of anything are often made up for by new market entrants. Banks are no different in this regard.

Back in the summer of 2010, with its small-business clientele suffering from tighter than normal credit, Walmart’s Sam’s Club subsidiary announced its willingness to provide its customers with $25,000 lines of credit. ...

... Much the same is occurring now at Amazon.com. Traditional banks remain careful about lending, but Amazon, flush with cash, is eagerly substituting for the banks. Through its Amazon Capital Services subsidiary, Amazon is helping the sellers on its website to access credit that is in short supply at the moment from banks.

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