Our financial system is barely working

I received phone calls from two friends this week and I think they illustrate how our banking system and broader financial system is barely working.

A friend from the southeast of the U.S. called me on Monday and asked for my advice and help (please excuse my generalities to protect my friends and their exact situations and details). He is contractor and is bidding on a contract for a small part of several hundred million dollar energy project. His part is a couple of million dollars. He needs some short term financing to put a deposit for the materials he will use. He went to his local bank and they told him no. The bank manager that he has dealt with for years told him they want nothing to do with construction.

My other friend on the west coast works at a restaurant that is growing like a weed. They seem to have expanded a little too fast in a new location and had a major cost overrun. Regardless, they are still very, profitable and generating cash but they now have some short term debt they have to pay off. They went to their bank, and the bank said, sorry, no. Now my friend’s company is in a short term cash crunch and that has nothing to do with the fundamentals of their business and they may be in trouble.

Both of these situations are relatively simple, extremely low risk financings for banks or financial institutions. And yet neither of my friends can find banks to finance them right now. This is very, very bad for the economy as a whole and speaks volumes for the state of the financial system.