When Easy Money Doesn’t Mean Easy Times

Easy money and tight credit. Who woulda thunk? It’s like the lion lying with the lamb. It shouldn’t happen. But instead of the usual combination of easy money and easy credit, that’s what we’ve got.

Borrowing money is still pretty cheap (hence the term “easy money”). But in the middle of massive write-downs amounting to over $150 billion and climbing, banks are experiencing a serious credit crisis.

They don’t have as much to lend as before. They need more capital to cover lending. And they’re being very careful about who they lend to. The banks have gone from one extreme (lending to anybody with a heartbeat) to the other (lending to only highly rated borrowers). So credit is tight.

Many businesses that want to borrow for legitimate reasons – to put money into expansion, for example – won’t be able to. Individuals face the same constraints. The borrowed money that used to build houses and factories is disappearing.

Banking problems aside, the economy isn’t doing great. But it’s the banks that have created the biggest mess and will force us into a recession. When banks stop lending, the economy stops growing.

Don’t invest in banks and companies with big debts. They won’t be able to refinance them. Instead, put your money in companies with exceptional cash holdings and cash flows (categories that you’ll find in Yahoo/Finance “Key Statistics”). Look at their total debt to equity ratio. It shouldn’t be more than 0.5 (except for capital-intensive industries like auto manufacturing, which can have ratios as high as 2).