Today’s economic laff riot comes from Fed Chairman Ben Bernanke, in a speech calling for more lending to small businesses. “Small businesses are central to creating jobs in our economy,” he said. “They employ roughly one-half of all Americans and account for about 60 percent of gross job creation.”
What Bernanke didn’t mention is this sobering stat from the Census Bureau: Small business led the way in hiring after each of the three previous downturns; much of this came from companies with 20 or fewer workers. This time, small businesses aren’t hiring. It is, as the Los Angeles Times reported, “a historical change of major proportions.” Small outfits have closed in huge numbers, as Seattle neighborhoods can attest as they mourn many of their distinctive shops that are now shuttered.
The reasons are several, including the collapse of the real-estate market, moribund demand for goods and services, uncertainty and an ominous drop off in the formation of new businesses. Bernanke focused on another big issue, access to credit.
Bank lending to small businesses fell from $710 billion in the second quarter of 2008 to less than $670 billion in the first quarter of this year. The Fed has spent months on “fact finding” forums with small-business owners and others. Today, Bernanke had a touch of defensiveness in his talk:
At the Federal Reserve, we helped bring capital from the securities markets to small businesses through the Term Asset-Backed Securities Loan Facility — the TALF program. More than 850,000 small business loans were financed in part by securities whose issuance was supported by TALF. We have also been focused on strengthening the nation’s banks, so that they can resume normal lending as quickly as possible.
Unfortunately, the Fed blew most of its firepower — perhaps trillions — to prop up the big financial doomsday machine that caused the crash. This ranged from saving Too Big to Fail banks to pouring money into AIG so Goldman Sachs could be repaid 100 cents on the dollar for a highly questionable deal with the insurer. Cheap money and lack of prosecutions or re-regulation have allowed the machine to get back to normal, including hiring while the rest of the private job market is stagnant.
Then there’s the quaint, “so they can resume normal lending as quickly as possible.” The big banks now make their profits by trading with taxpayer-backed funds, a legacy of the repeal of Glass-Steagall in 1999. The sad reality is that much of the capital markets is no longer about creating companies and jobs, a huge and destructive change. (Check out Paul Volcker’s views on this in the New York Times).
That leaves the community banks, which are burdened with real-estate debt. So it’s no wonder small business is struggling. And all the fact-finding won’t fix it.