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Home Publications Blogs Beat the Press Franchise Fantasies and the "Financial Crisis"

Franchise Fantasies and the "Financial Crisis"

Saturday, 10 July 2010 10:08

The people who could not see an $8 trillion housing bubble before it wrecked the economy are still having a hard time seeing it even after it wrecked the economy. They fail to understand that the economy's problem is due to a loss of demand. We have seen more than $16 trillion in wealth vanish. The demand generated by this wealth cannot be easily replaced without strong action from the government.

While this basic point seems pretty straightforward, the media repeatedly refer to the downturn as a financial crisis, implying that the problem is that the financial system is not operating properly. In this vein, the NYT had a lengthy piece that reported on the difficulties that franchise owners are having in getting financing in order to maintain or expand their operations.

It is undoubtedly true that franchise owners are having more problems getting credit, but this is primarily due to the weak economy, not the state of the financial system. In a weak economy, any operation's prospects are more questionable, which makes them a greater credit risk for lenders.

This can be easily demonstrated. Many firms that compete with the franchises do not franchise their operations. Instead, the company owns the individual outlets. These large companies (e.g Wal-Mart and many McDonalds) have no difficulty getting access to credit right now, in fact interest rates are currently at historic lows. If there was a market for franchises who want to expand, but can't get access to credit, we should expect to see the large chains jumping in to fill the gap. In fact, the opposite is happening, most major stores have curtailed their expansion plans because of the downturn.

So, chalk this one up as fiction.

Comments (5)Add Comment
written by izzatzo, July 10, 2010 12:52
Any teabagger economist knows that the reason franchises can't get loans is the same reason the unemployed refuse to take jobs, and the same reason consumers save rather than spend. Taxes. Debt. Ricardian Equivalence.

The coming crash from inflation and insolvency is as real for teabaggers as the 9-11 conspiracy is for Truthers.

It's the Obama Shock Doctrine. Big government, big debt and big taxes are killing business from the supply side. It's not from a lack of demand, because demand must come from supply and not the other way around.

Losing $16T in wealth has nothing to do with it. If a balloon is pulled below the surface of the water, no matter how far, when released it always floats back to the same level above the water.

It's Catch-22. The franchise is a supply source that creates demand that is suppressed by government intervention. Same for large corporations who cut back on expansion of their own retail outlets. It has nothing to with expectations of low demand and everything to do with avoidance of crippling government intervention.

If big government would just get out of the way, the economy that's trying so hard just below the surface to break free from socialist chains of tax and spend regulation could emerge and save us all from the coming Great Second Depression.

Read Econ 101 you buncha commies. If it was your money you wouldn't lend it or spend it either, you'd save it like the big corporations do which are flush with cash. Thanks to stupid liberals, we'll all have to drive further for a Big Mac because they'll be thinned out and spread apart out after the cut backs.
I'm Not Convinced
written by libhomo, July 10, 2010 8:15
Your argument assumes that big corporations act rationally. It also doesn't take into account that franchise hodlers often know more about local economic conditions than corporate executives from elsewhere.

I suspect there are elements of bankster misconduct in addition to the bad economy.
just seeing
written by Brett, July 11, 2010 6:18
If you saw the latest deficit scare story in the WaPo today: http://www.washingtonpost.com/...01956.html

This time they are using quotes from Alan Simpson and others on the deficit commission. Obama was asking for this kind of a story to happen... doesn't help him in the slightest, assuming he really does understand that the debt isn't the problem and shouldn't be the focus right now.
written by Ellen1910, July 12, 2010 7:24
Pizza is bad, worse than Dominos. If you feel like waiting over an hour for a delivery - then get the WRONG order - then eat pizza that tastes like cardboard you'll love Marco's! The staff is the worst group of teenagers with no sense of customer service. Just another chain.?>/i> Michelle 7/12/2010 http://maps.google.com/maps?hl...CCkQtwMwAA
How About Oversupply
written by FoonTheElder, July 12, 2010 11:52
The incentive for the franchisor is to open as many locations as possible, as that is how they get paid.

In the era of low cost credit, they vastly overexpanded their franchises as well as the franchises of their competitors on every available street corner. This is just another overexpansion situation.

Most neighborhoods are full of franchises of all types, many of which were only marginally profitable during good economic times. The cheap money policies that allowed mass expansion of franchises is gone.

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.