Franchise Fantasies and the "Financial Crisis"

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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.