The most recent presidential election was the first time in history, or at least in recent political history, that small business concerns rose to the level of national debate. But in the year since his election, President Barack Obama has been a Johnny-come-lately to Main Street’s crisis.
During the critical first months in office, the administration was consumed by problems on Wall Street. Rightly or wrongly, their effort did help stave off a collapse of the financial system that would have turned a deep recession into a global depression.
But now that a nascent recovery is under way, the nation is about to pay the price for the administration’s too-little-too-late effort to help Main Street get back on its feet.
For small businesses, the credit crisis not only continues to fester, but is growing worse with each passing day, to the point that it could threaten, or drag out, the recovery. The administration’s delay in addressing Main Street’s problems not only has made matters worse, but is now limiting its ability to come up with solutions to break the credit logjam.
Raj Date, chairman and executive director of the Cambridge Winter Center, a nonpartisan think tank dedicated exclusively to researching U.S. financial institutions’ policy issues, summed up the situation in a hearing this week before a subcommittee of the Senate Banking Committee.
Until now, the small business credit crisis has been muted, somewhat, by a simple lack of demand for loans. But over the coming quarters, as the economy recovers, small business loan demand is expected to explode, according to Date. The problem will shift from a “deficit of demand, to a deficit of supply,” he said.
“I fear that we are at something of a transition point in the marketplace today: the point at which credit contraction becomes less driven by a rational decline in demand for loans, and becomes more driven by a structural shortfall in supply [of loans].
“Absent structural remedies to that supply problem, the lack of small business credit could become a serious impediment to both the timing and speed of a recovery in the real economy,” he said.
The problem is being compounded because the banking system — which includes community banks — is in no shape to meet the needs of small firms, although they are the ones that traditionally generate 64 percent of the nation’s new jobs.
“The reason for this is a structural shift that has been catalyzed by the crisis: the ‘re-localization’ of small business lending,” Date said.
During the anything-goes Bush years, major financial institutions increasingly shifted small business accounts to credit cards, while community banks devoted more of their portfolios to commercial real estate lending.
As a result, small business finance for many firms became tightly intertwined with consumer finance, Date explained. “Because most small businesses are often quite small, their liquidity sources and uses are frequently related to, and even commingled with, the liquidity positions of their owners.”
Indeed, credit cards and home equity loans became a principal source of small business financing. In addition, traditional bank lending for such things as equipment, inventory, and receivables migrated from deposit-funded banks to capital-market-funded finance companies, he noted.
None of these developments have stood up well in the recession. Available home equity and credit card lines of credit, for example, have declined by an astonishing $1.6 trillion, or 30 percent, over the past two years. Meanwhile, bank lending fell by about $587 billion, or 7.5 percent, in 2009 alone — the largest annual decline since the 1940s, according to the Federal Deposit Insurance Corporation (FDIC).
The bankruptcy of CIT Group, the nation’s largest small business financer, marked the virtual collapse of the capital market finance industry, which fell in step with the stock market bubble. And the retreat is still underway. GE Capital, for example, reportedly plans to shrink its portfolio by some $80 billion over the next few years.
Although community banks have been touted for avoiding the riskier investment practices of major money center banks, thousands are reeling from the aftereffects of the Wall Street meltdown. Their problems are spreading as commercial real estate prices plummet in step with the housing market.
Commercial real estate exposure will be a significant reason banks will remain under stress in 2010, and it is a key reason 702 banks are on the FDIC problem bank list, according to Eric A. Gillett, vice chairman and CEO of Sutton Bank in Attica, Ohio, who testified on behalf of the Independent Community Bankers of America.
But the problems go much deeper than that. Nearly 3,000 banks — 40 percent of the nation’s total — are considered to have risky concentrations of commercial real estate loans, according to a recent report by the Congressional Oversight Panel (COP). All of them are small to mid-sized banks.
The COP is “deeply concerned” that commercial real estate losses could weaken these banks and contribute to prolonged weakness throughout the economy, according to chairwoman Elizabeth Warren.
Losses could range as high as $200 to $300 billion, the report said, as more than $1.4 trillion in commercial real estate loans come up for refinancing between now and 2014.
One result is that banks are holding substantial cash positions and investing in portfolios of low-risk government and GSE securities, rather than more capital-intensive consumer and commercial loans, said Date.
No wonder small business owners are incensed at the Obama administration’s plan to throw money at community banks through its recently proposed Small Business Lending Fund (SBLF).
Steve Gordon, founder of Instant Off Inc., a Clearwater, Fla.-based company that makes faucet devices, summed up the sentiment during another congressional hearing this week. “I went as a messenger,” Gordon told The Wall Street Journal. “They [should] not give banks another dime of money.”
Although Date notes that the SBLF includes incentives for banks to lend to businesses, he believes they are too modest to make a difference. He favors easing regulatory capital requirements on small business loans to immediately spur lending.
Gordon, on the other hand, is among a growing number of small business owners who want the government to lend directly to them. Legislation authorizing a direct-government-lending program is pending in Congress, but it is controversial. A similar measure passed in the House version of the stimulus bill but was eventually dropped.
Rep. Nydia Velazquez, D-N.Y., who chairs the House Committee on Small Business, is backing the bill. “Given the public’s view of TARP [Troubled Asset Relief Program], there is little appetite left for proposals that cut more checks to banks,” she maintains.
President Obama, however, is skeptical of the idea because he believes it would require a massive government bureaucracy to administer and would take a least a year to get up and running. But there is another solution, and ironically President Obama advocated it during the campaign.
While the Small Business Administration largely guarantees loans, it does have the authority to make direct loans during national disasters, such as floods and hurricanes. During the campaign, Obama proposed expanding that disaster program for businesses hit by the economic turmoil. It’s in place and ready to go. The president simply needs to declare a national disaster.
Indeed, if the current economic mess isn’t a national disaster for small businesses, then what is?