The Ongoing Small Business Recession Has a Cause: Banks

Last Updated May 14, 2010 12:42 PM EDT

It's a scandal that we're even talking about the recession drawing to a close at a time when the financial system is starving small businesses for credit and forcing them to shed jobs. Thank your friends, the banks. And consider the idea of more federal stimulus.

This week saw another survey from the National Federation of Independent Businesses detailing the grim conditions facing small business owners. If you want to know why unemployment numbers still offer a rough picture for job-seekers, look no further than Main Street -- which is seeking better access to credit.

"The grim state of the small business sector will limit the upswing in private sector employment, even as big companies start hiring again at a reasonable clip," Ian Shepherson, the chief economist at High Frequency Economics, wrote in a research note.

One reason for the dismal state: credit still isn't flowing like it should to small business.

The relationship between small businesses and their banks should be front-and-center in the debate over financial regulatory reform, if for no other reason than that these enterprises remain the vital entrepreneurial core of the American economy, and will create jobs at a ferocious pace if conditions let them. We have ample evidence from institutions like the IMF that big corporations have capital markets and smaller firms are stuck with their house banks, with disastrous results.

And in the long term, we have to ask ourselves if breaking up big banks would help ensure the flow of credit to small businesses on reasonable terms. A detailed NFIB study from February concluded that having a smaller house bank gives you a better chance of getting a loan, all other things being equal, than if you rely on a big one. JP Morgan Chase CEO Jamie Dimon talks about the U.S. economy needing big banks as though it were a proven premise. It's not.

Yet, there's a bit of a disconnect at the NFIB, which doesn't want to hear politicians blame banks. In assessing its most recent survey, it downplays the role of loans:

What businesses need are customers, giving them a reason to hire and make capital expenditures and borrow to support those activities ... Credit? Washington continues to play this card as a major cause of the slow paced of recovery. Regular borrowers did report credit "hard or harder" to get [in NFIB's April survey], but that should be no surprise. So with capital spending, inventory investment and hiring plans at record lows, there is little credit demand.
The relevant question is not whether a credit-induced recession has also constricted demand, resulting in fewer requests for loans. That's simply the nature of recessions brought on by financial crises. The relevant question is how you break this cycle and get back to normal growth patterns. The federal government took explicit responsibility for the financial system by creating the $700 billion TARP to prevent a seizing up of credit. To the extent that small businesses are facing unreasonable borrowing terms, that mission has failed.

As for what NFIB says small businesses really need -- customers -- there's a way to make that happen, too: a new federal stimulus package. The big one passed in early 2009 stopped the immediate slide, but now we need to get out of the hole.

Any takers?

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  • Carter Dougherty

    Carter Dougherty, a former economic correspondent for the International Herald Tribune and The New York Times, is fascinated by the intersection between policy and business, in the United States and abroad. He shared in a Loeb Award, business journalism's most prestigious, while at the NYT. But he still looks back fondly on his days trudging through central Africa, reporting on Congo, Darfur and other rough spots.