Published: Sunday, December 6, 2009
We need action to aid small business
There is a famous quotation attributed to Adm. Chester W. Nimitz, who was in charge of U.S. forces in the Pacific during World War II. It is short and to the point: “When in command, command.”
The U.S. government is in command of economic policy, but it seems timid and uncertain about how to use its resources. We will eventually dig ourselves out of this recession but it will be no thanks to anything that the feds are doing.
The administration seems to be waiting around for low interest rates to produce some sort of miracle cure for unemployment. But since the economy has been mainlining low interest rates for years now, it is difficult to see how a prescription dose of the same medicine is going to change things much.
One of the problems with monetary policy is that it works best, or only, if the economy stays within the norms — the fairly narrow limits of behavior that mark an un-jolted economy’s passage through time. The consensus economic models are reasonably accurate only within those norms and only as long as the economy behaves itself and knows its own limits. That’s why economic forecasts tend to be most accurate when you least need them.
There is a difference between economic policy and crisis management. The Federal Reserve and the Treasury Department intervened when Wall Street and our financial system seemed in imminent danger of a total collapse. That was crisis management; they were the first responders and they did their job well.
Economic policy, though, is different from emergency response. Its goal is to change daily, routine behavior, not stanch bleeding.
Daily, routine behavior in our economy includes financing transactions — greasing the wheels of commerce — of businesses large and small. Smaller businesses are generally more dependent on banks for this kind of loan financing. Bank loans, in fact, provide for three-fifths of all small business credit needs.
It is one thing for small businesses to be dependent on bank financing in normal times, though, and quite another to have that same dependence when banks are hunkering down and looking at loan applications like they were the source of an unpleasant odor.
The Federal Deposit Insurance Corporation released its latest report on banking’s vital signs, and it tells the story of why small businesses and jobs seem frozen in their tracks.
The answer is simple: banks aren’t making loans. Third-quarter loan balances declined by the largest percentage in a quarter century. Over the July-September period, commercial loans shrank by $89.1 billion.
This is not a blame issue. Banks are hunkering down because while many Americans are now hearing the music and feeling the rhythm of the economic recovery, the banks are tuned to another station.
It is certainly understandable that bankers aren’t crazed with excitement about beefing up their loan portfolio. The FDIC report also notes that while earnings for banks are up substantially overall, triple, in fact, what they were a year earlier. But over a quarter of the banks in the U.S. lost money in the third quarter.
And the FDIC now has 552 financial institutions, mostly banks, on its problem list, which is: a) not a good place to be and b) not a compilation of likely prospects if you are a small business owner looking for a loan.
Eventually, of course, the economy will recover sufficiently to induce bankers to make business loans. Still, eventually can be a very long time, especially if you don’t have a job … or if you are an economic policy maker trying to make a dent in the unemployment numbers.
That’s where economic policy needs less dithering and more imagination. Lowering interest rates, by itself, will not speed up an economic recovery much beyond what it would accomplish on its own steam. Banks need some help to keep their small business loan risks from catapulting them onto the problem list. They need a loan guarantee program.
Theoretically, that is what the Small Business Administration does, but it is hopelessly outmatched by the size and depth of this recession — even it were not an organization that has been chronically neglected and underfunded by this and previous administrations.
We need a small business loan guarantee program that is immediate, big enough to have an economic impact right now when it is needed, shares responsibility with lending banks, and is promptly and efficiently self-liquidating. It is just that simple.
Congress, for some reason, has no trouble launching an investigation into a pair of White House party crashers but cannot seem to find the time to address this critical jobs issue of small business loans. Do we care about jobs? Apparently, some jobs, yes; others, not so much.
James McCusker is a Bothell economist, educator and consultant.
The U.S. government is in command of economic policy, but it seems timid and uncertain about how to use its resources. We will eventually dig ourselves out of this recession but it will be no thanks to anything that the feds are doing.
The administration seems to be waiting around for low interest rates to produce some sort of miracle cure for unemployment. But since the economy has been mainlining low interest rates for years now, it is difficult to see how a prescription dose of the same medicine is going to change things much.
One of the problems with monetary policy is that it works best, or only, if the economy stays within the norms — the fairly narrow limits of behavior that mark an un-jolted economy’s passage through time. The consensus economic models are reasonably accurate only within those norms and only as long as the economy behaves itself and knows its own limits. That’s why economic forecasts tend to be most accurate when you least need them.
There is a difference between economic policy and crisis management. The Federal Reserve and the Treasury Department intervened when Wall Street and our financial system seemed in imminent danger of a total collapse. That was crisis management; they were the first responders and they did their job well.
Economic policy, though, is different from emergency response. Its goal is to change daily, routine behavior, not stanch bleeding.
Daily, routine behavior in our economy includes financing transactions — greasing the wheels of commerce — of businesses large and small. Smaller businesses are generally more dependent on banks for this kind of loan financing. Bank loans, in fact, provide for three-fifths of all small business credit needs.
It is one thing for small businesses to be dependent on bank financing in normal times, though, and quite another to have that same dependence when banks are hunkering down and looking at loan applications like they were the source of an unpleasant odor.
The Federal Deposit Insurance Corporation released its latest report on banking’s vital signs, and it tells the story of why small businesses and jobs seem frozen in their tracks.
The answer is simple: banks aren’t making loans. Third-quarter loan balances declined by the largest percentage in a quarter century. Over the July-September period, commercial loans shrank by $89.1 billion.
This is not a blame issue. Banks are hunkering down because while many Americans are now hearing the music and feeling the rhythm of the economic recovery, the banks are tuned to another station.
It is certainly understandable that bankers aren’t crazed with excitement about beefing up their loan portfolio. The FDIC report also notes that while earnings for banks are up substantially overall, triple, in fact, what they were a year earlier. But over a quarter of the banks in the U.S. lost money in the third quarter.
And the FDIC now has 552 financial institutions, mostly banks, on its problem list, which is: a) not a good place to be and b) not a compilation of likely prospects if you are a small business owner looking for a loan.
Eventually, of course, the economy will recover sufficiently to induce bankers to make business loans. Still, eventually can be a very long time, especially if you don’t have a job … or if you are an economic policy maker trying to make a dent in the unemployment numbers.
That’s where economic policy needs less dithering and more imagination. Lowering interest rates, by itself, will not speed up an economic recovery much beyond what it would accomplish on its own steam. Banks need some help to keep their small business loan risks from catapulting them onto the problem list. They need a loan guarantee program.
Theoretically, that is what the Small Business Administration does, but it is hopelessly outmatched by the size and depth of this recession — even it were not an organization that has been chronically neglected and underfunded by this and previous administrations.
We need a small business loan guarantee program that is immediate, big enough to have an economic impact right now when it is needed, shares responsibility with lending banks, and is promptly and efficiently self-liquidating. It is just that simple.
Congress, for some reason, has no trouble launching an investigation into a pair of White House party crashers but cannot seem to find the time to address this critical jobs issue of small business loans. Do we care about jobs? Apparently, some jobs, yes; others, not so much.
James McCusker is a Bothell economist, educator and consultant.
Comments
(
