“Banks Won’t Take Care Of (Small) Business”

Dolors & Sense

by Sanford Rose

KISSIMMEE, FL—(Weekly Hubris)—7/26/10—Small business is called the great engine of job growth. It isn’t.

Not if you’re talking about net growth. On a gross basis, the observation is true. But there is so much hiring and firing, as small businesses appear and disappear (like virtual quantum particles) that net job creation ends up as a less impressive magnitude.

Nonetheless, small and fledgling businesses make a considerable employment contribution, and the country needs their efforts.

Banks aren’t helping, remaining tight-fisted with loans. The reason: in part, the operation of the pendulum principle. Whereas three years ago, the banks were excessively generous, now they are excessively cautious.

They remain worried about the elevated chance of loan defaults, both from old credits that have soured but haven’t yet been booked as losses as well as from potential new credits.

Remember that while banks have plenty of money with which to lend, they are uncertain about the adequacy of their capital, which is mostly money that has already been credited to profits and therefore can be used to cover loan losses unless, that is, events demonstrate that its allocation to the profit account was premature.

Also, borrower collateral, which is often real estate, both residential and commercial, has plunged in value. Without adequate collateral, many small-business borrowers no longer qualify for credit.

Of course, it is the banks’ prior over-lending that led to the fall in real estate values and the threat to their capital cushions. No matter. This is a problem that won’t go away.

Over-lending spawned a crisis that now culminates in under-lending.

The obvious way to attack the problem is to stabilize and raise values in the real estate market.

Tall order. But why have we ended the tax credit for new and existing home buyers?

Obviously, because it costs too much. No, we only think it costs too much. Its cost–even if we make it bigger and longer term–is, by any reasonable calculus, less than the cost of the joblessness of those who could have been, but are not being, employed by those businesses that could have started up operations or expanded existing ones if their banks, more confident than they now are of future real estate values, had provided loanable funds.

This is a rich country. But right now, it’s too poor not to spend, perhaps even lavishly, to rejuvenate real estate and thus facilitate the bank lending that is not forthcoming and yet is vitally needed by small business.