One of the big debates in US economic and financial circles amid the sluggish recovery has centered around this question : are small businesses suffering, and not hiring, mainly because of a lack of demand for their products and services and uncertainty about the future, or is lack of available credit also constraining them in a significant way?
The Federal Reserve Bank of New York weighed in on this question today, releasing a new survey of small businesses conducted during the summer. “Prudent lending to creditworthy small firms who contribute to the recovery is in our collective interest: it’s good for our communities and it’s good for the American people,” said Kausar Hamdani, community affairs officer at the New York Fed.
Better late than never. After months of congressional wrangling, Barack Obama, US president, finally signed into law a bill designed specifically to help small businesses.
Although their importance is sometimes overstated – many small companies make their money off the health of large corporations – they are nonetheless an important source of economic output in their own right, and that energy has definitely been lagging in this economic recovery.
The Obama administration’s answer to the problem is a $30bn fund that allows banks to receive capital injections with increasingly favourable interest rates the more they can prove that they are lending money to small businesses. This should offer some relief against the lack of credit that is hampering some small companies. In addition, there are also some $12bn in tax breaks in the legislation, which will hopefully lead to more hiring.
“So this law will do two big things. It’s going to cut taxes, and it’s going to make more loans available for small business,” Mr Obama said. “It’s a great victory for America’s entrepreneurs.”
But whether or not this moves the economic needle in any way is very much open to debate.
One of the largest – and often unspoken – restraints on the US recovery in this cycle has been the failure of small businesses to start cranking out more output and employment, partly because of sluggish demand for their products, but also because of a lack of available credit.
Ben Bernanke, Federal Reserve chairman, took on this issue this morning in a speech that essentially raps the banks on the knuckles for not being more lenient with small businesses.
“Our message is clear: consistent with maintaining appropriately prudent standards, lenders should do all they can to meet the needs of creditworthy borrowers. Doing so is good for the borrower, good for the lender and good for our economy,” Mr Bernanke said.
Did you spot the big hole in the Obama speech on job creation today? Nothing new on small business access to credit – possibly the single biggest obstacle to job creation in the US. This is a huge issue for the economy, the White House and the Fed.
With the Fed rightly withdrawing from sectoral intervention via financial markets now the financial system has normalised, supporting small business access to finance is properly a job for the government.
On paper this is not difficult. The government could provide guarantees to limit losses on small business loans or create a funding vehicle to coinvest in such loans alongside banks (I prefer this route as the taxpayer and the bank would have the same economic interests).