Monday, December 3, 2007

Yet more credit crunch fallout — businesses as financiers

The amount of major companies that have their own credit arms is staggering. Sony, for example, makes more from financial matters than it does from Sony Pictures.

Here’s the bottom-line story:

How big is financing in the economy? One way to measure it: 18% of the $13 trillion market value of S&P 500 companies is for the financial sector. That bulge is a big part of why the market has been choppy since last summer: Credit problems are dragging down the banks, brokers and insurers. Another measure is profits. The finance sector accounts for 28% of the index's combined $748 billion in earnings for 2006. Those earnings are likely to be down in 2007 when writeoffs are included. Neither of these percentages for financial services includes the financial activities of companies like Sony and GE.

Here’s another way to look at how much is riding on the soundness of borrowers. Debt at U.S. households, governments (state and federal) and nonfinancial businesses now stands at 217% of gross domestic product, up from 141% a quarter of a century ago. So a small rise in interest rates or in defaults is likely to have a bigger impact than it once would have had on business bottom lines and consumers' ability to spend.

In short, as “notthere” noted in his comment to my post about the subprime crisis extending to Narvik, Norway, there’s a lot fewer barricades to financial problems rapidly spreading. It’s like the Dust Bowl Midwest, after farmers had removed windbreak trees in order to plant crops row to row. That was fine and dandy — until the dustbowl hit, and eastern Colorado wound up landing in places like Ohio or even further east.

Paul Kennedy, in “The Rise and Fall of the Great Powers,” said that with countries in the past such as Britain and Holland, a seminal turning point was when they moved from making money off of making things to making money off making money.

Well, we’re definitely moving that way ourselves.