Cheap latte drinkers feel the pain

The credit crunch arrives at McDonald's. See, I told you the apocalypse was coming!


Andrew Leonard
October 1, 2008 3:00PM (UTC)

Pity the poor latte-drinking McDonald's customer. Bloomberg reports that the Bank of America is refusing to provide additional lending credit to McDonald's franchisees to upgrade kitchen equipment. (Politico's Ben Smith and Paul Krugman both have the tip.)

The information comes from a memo from McDonald's headquarters to franchisees, obtained by Bloomberg, that cites BofA's purchase of Merrill Lynch as the reason why it can no longer extend credit.

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According to the memo, a Bank of America loan program called "Eagle" is aimed at store owners investing in the introduction of lattes, mocha and other specialty coffee.

But the eagle's wings have been clipped, a sign of what happens when Wall Street's credit crunch starts trickling down to Main Street.

Now I will concede that there are ludicrous aspects to this story. Lattes, at McDonald's? Surely, Ray Kroc is spinning in his grave. Besides, we all know that only West Coast elitist liberal Obama voters drink lattes, so how bad could this really be for Main Street America?

And yet, when you combine the McDonald's tidbit with the news that Americans are increasingly turning to their credit cards to pay for consumption, while credit card companies are jacking up interest rates, you can quickly see how tightness in credit markets has the potential to smack everyone's pocketbook. There are also scattered reports that good old-fashioned manufacturing companies like Caterpillar and Honda are finding it increasingly expensive to raise operating cash by selling bonds.

The pace of recent events slowed enough today that I was able to take two hours to go back and read all the reader comments in How the World Works over the last two days. I apologize for not monitoring comments on a more real-time basis -- but life has been busy! A significant fraction, perhaps even a majority, of readers have been taking me to task for buying into an "imminent apocalypse" scenario, or for transmogrifying into some kind of capitalist tool who has been brainwashed into delivering the talking points of our high-finance overlords.

Here's my position. Like most of you, I shed no tears for the investment banker who is out of a job because of bad bets on mortgage-backed securities. But I do accept the proposition that perhaps the single greatest danger to the global economy -- and to you and me -- is a massive credit contraction. That is how depressions start -- or at least very serious recessions. It is also my strong sense that stresses in the global economic system are spiraling ever wider, and that in our tightly coupled, globally interlinked economy, a great unraveling could happen with great speed. (This is not a new obsession of mine -- I've been worrying about it since 1997!) We have witnessed extraordinary economic events over the last three weeks. If even a flawed bailout rescue plan buys us enough time to ward off a drastic intensification of the crisis, then I'm inclined to bless a massive market intervention rather than just let the markets, red in tooth and claw, settle affairs for themselves.

If we get a better bailout bill this week because of the intransigence of rank-and-file Democrats and Republicans on Monday then that is a happy end to this installment of the story. But if what really happens is that concessions are made to the House Republicans to get their support, then I suspect we will end up worse off. But I do believe that time is of the essence. Banks are failing in increasing numbers all over the world. Bad news zips around the world in nanoseconds, and so does bad credit.

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I could be totally wrong. It would certainly not be the first time. I will adjust my interpretations according to whatever new data and convincing interpretations of that data come in, and I find all your comments very useful in establishing a framework for thinking about all this. But I also find it a little ironic that after several years in which I was regularly criticized from the right for being too bearish on the economy and predicting that bad, bad things could happen, I'm now getting flak from the left for saying that really, really bad, bad things could happen.

I'm not saying that a bad latte at McDonald's is one of those things, but it does seem like we're headed down a slippery slope.

UPDATE: Reader davegnyc says a very hurtful thing to me while providing a link to a Chicago Tribune squib in which BofA denies any McDonald's-related credit problems.


Andrew Leonard

Andrew Leonard is a staff writer at Salon. On Twitter, @koxinga21.

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