Like cracking a safe, Ben Bernanke's Federal Reserve has been hard at work enabling small business lending. The Fed's series of small business conferences across the country have fulfilled their purpose of information gathering, and so now the central bank moves to idea generation and strategic initiative to free up capital for viable small businesses. We applaud Chairman Bernanke's efforts in this regard, and find him creating economic value in this release of capital and discovery of lending efficiencies.
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Federal Reserve Chairman Bernanke today addressed a Fed sponsored forum on the topic of "Restoring the Flow of Credit to Small Businesses." On a slow starting Monday with little other news to chew on, popular press gave this address more attention than it might otherwise have received. Of course, the small business sector is deserving of this attention, given that it employs roughly one-half of all Americans and has been responsible for roughly 60% of gross job creation. Start-ups of two years or less are especially central, as this 10% portion of the workforce has created about a quarter of all jobs over the past 20 years.
Wall Street Greek has addressed this critical problem often, noting mostly that the President's efforts to drive job growth through tax incentive is futile. We have mentioned on more than one occasion that jobs will follow business, not vice-versa. While tax incentives are nice, the hiring of employees remains a cost burden until commensurate revenue exists. That said, the small business sector has its own wonderful driver that is embedded within the characteristics of the sector itself. Our article authored this past May, entitled, "Small Business: The Little Engine that Could," discussed the intrinsic driver behind small business initiation and initiative. It's the small businessman himself, the keeper of the American dream.
The Fed's latest get-together marked a sort of culmination of a series of 40 such meetings across the country, where small business players including entrepreneurs, policy makers, lenders, economists, Fed Board members and other groups discussed the current state of affairs. The Fed's mission was to gather information in order to see with full scope the small business sector; to understand where flaws exist, and in the end, to better enable viable small businesses to receive funding capital. Today's meeting in Washington marked a turning point, where these conferences move from the phase of information gathering to idea generation; from here, decision makers will move toward effective policy creation and strategic initiative engineering toward the end of small business funding and job creation.
The initiative came together for two reasons, because small businesses are not hiring and because they are reporting ongoing difficulties in gaining access to credit, based on survey by the National Federation of Independent Business (NFIB). Bernanke noted that one measure of banks' lending to small businesses reported a drop in aggregate levels from $710 billion in Q2 2008, to below $670 billion in the first quarter of 2010. Bernanke importantly asked, "An important but difficult-to-answer question is, How much of this reduction has been driven by weaker demand for loans from small businesses, how much by a deterioration in the financial condition of small businesses during the economic downturn, and how much by restricted credit availability? No doubt all three factors have played a role.5 Clearly, though, to support the recovery, we need to find ways to ensure that creditworthy borrowers have access to needed loans."
Bernanke boasted of the TALF impact on small business lending, attributing 850K loans to small businesses to the support of the program. He also reminded of the strengthening of the US banking system, and broad measures like the stress tests that allowed banks to build a base of reserves adequate to allow confidence restored and new lending initiated. In addressing bank concerns about bank examiner inconsistencies and difficulties, the Fed has acted to reprogram its inspectors and has retrained them, while continuing to seek feedback from banks. Bernanke states that while certain lending standards must be maintained, banks should still do all they can to provide funds to credit worthy borrowers, and they should be allowed to.
We have discerned an important shift in the lending mindset based on changes in the economic environment. Lenders are focused on collateral value due to a fear-based concern tied to an increase in loan defaults and borrower failures. In many instances where cash flow generation remains solid, small business enterprises are still finding capital hard to come by due to decreased collateral values. This leads us to wonder if the only thing that can fix the economy is the economy. Perhaps the only thing that can loosen lending is decreased default rates.
Whether a special problem exists or not, this initiative undertaken by Bernanke's Fed is important. The Fed has undertaken a wise consulting enterprise that is sure to unlock value as it improves the environment around small business lending. Efficiencies are being found and freed, and so Ben Bernanke's Fed is therefore creating economic value.
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