Small Business: Too-Big-To-Fail

Small Business: Too-Big-To-Fail


Small business will lead us out of the recession and fuel the recovery. That is the belief among many of the nation’s economists. To understand the role Small B plays in society, here are some basic statistics.

The Small Business Association reports that from 1993-2008, 64% of new jobs were created by firms with 1-499 employees.

“Small businesses employ just over half of U.S. workers. Of 119.9 million nonfarm private sector workers in 2006, small firms with fewer than 500 workers employed 60.2 million and large firms employed 59.7 million. Firms with fewer than 20 employees employed 21.6 million.”

The numbers reveal that supporting and strengthening our nation’s largest employer, Small Business, is a financial imperative.

The February 5, 2010 “jobs report” revealed that one million more jobs were lost in 2009 than was previously thought. The good news is the national unemployment rate decreased slightly from 10.3% to 9.7%. According to one economist, the unofficial unemployment rate is more like 17% when including all those ineligible for unemployment: sole proprietors, freelancers, consultants, long-term unemployed and temp workers. Another economist said the real numbers were closer to 22% if underemployed workers were included (employees whose wages and hours have been substantially reduced). If we examined particular sectors like housing or retail, the numbers might double. Clearly, the state of unemployment in the U.S is in critical condition. Job growth reached its lowest level in 26 years in October 2009.

Something must be done to turn things around and fast.

Small Business Credit Frozen

Unlike big banks and big corporations, Small B does not have piles of excess cash to draw from. Limited access to liquidity is the nature of being “small.” Most owners draw capital for investment and expansion from business credit lines, corporate credit cards, personal assets, and bank loans.

Since the fall of Lehman Brothers in September 2008, small business owners are painfully aware that available credit has evaporated. For any business, other than big banks or large corporations who can simply issue debt for sale (bonds), the credit freeze is as dire in February 2010 as it was in October 2008.

Over six months, from April 2009 to October 2009, “The 22 banks receiving the most bailout money reported to the Treasury that they had decreased small business lending by $11.6 billion.” In October 2009, the U.S. Treasury reported another $1 billion for small business was eliminated,” as a consequence of the banking crisis.

While the global credit crisis compelled the United States government to take emergency measures to liquidate the nation’s largest financial institutions, small business was left in the cold. After three trillion dollars worth of government aid to the nation’s lenders, credit  is still not flowing beyond the top of the food chain.

Begging Banks for Money

In December 2009, President Obama urged TARP banks once again to investigate “every responsible way” to increase lending, claiming that rescued banks were “obligated” to help American business after being saved by taxpayers. They did not agree. No amount of noblesse-oblige would get “Fat Cat bankers” biting. “No matter what the President says, we are not lending,” claimed one banker anonymously.

Understanding that credit to Small B must be resuscitated as a matter of urgency for the nation’s employment rolls, the Big O is at it again with hopeful entreaties to the nation’s smaller banks.

“I‘m announcing a proposal to take $30 billion of the money that was repaid by Wall Street banks, and use it to create a new Small Business Lending Fund that will provide capital for community banks on Main Street. The more loans these banks provide to creditworthy small businesses, the better a deal we’ll give them on capital from this Fund…this will help small banks do even more of what our economy needs - ensure that small businesses are once again the engine of job growth in America.”     President Obama, February 2, 2010.

Yet community banks are not lending either. Why, you may wonder? According to finance blogger Barry Ritholz, because it is “rational.”

Banks are not lending because the way the Fed/Treasury bailouts were structured, they are encouraged NOT TO LEND. Why? They need to rebuild their capital levels after 30 years of declining safeguards and capital ratios.”

Looking closer at the President’s “creditworthy small business” remark….If you were a bank would you lend to real-estate agencies, architect firms, housing developers, retail boutiques, or local jewelry shops? These are a few of the businesses in my neighborhood hanging on for dear life while waiting for the tide to turn. How long can they wait?

Americans are going to buy or rent homes again. Builders and architects will continue to create them. People will still want engagement rings. The neighborhood coffee shop will continue to feed the locals-in normal times at least. These are not obsolete business models, yet revenues and customers are scarce. What bank would/should risk lending to them in an uncertain economy? Yet should a recession allow us to turn our backs on businesses that have served the community for dozens of years?

Okay, there we have it. Big Banks refuse to lend. Little banks can’t afford to lend. (The FDIC has closed the doors on 140 regional banks in 2009.) Why would we try the dead-end approach of begging banks to lend one more time? From where I sit as a small business owner myself, begging banks to lend is a futile waste of energy and precious moments. Been there, done that. Time to move on. They will dance; they will murmur, but they will not lend.

“Mr. President, we are proud to be Americans and happy to collect any deposits given to us by our community, but Mr. President we are worried about the FDIC, regulation, and frankly going bankrupt. You see Mr. President. It’s either us or them. If we have to make a choice, we would rather it be them.” …yada yada.

The Real GDP

Question: How do we revive businesses and industries left hanging by a thread? Answer: With liquidity of course. The way we do for our big brothers and sisters.

Our real GDP in America is our labor market. Our best natural resources are people. Put our money behind our people and the engine will turn. Move money out of the top end of the capital markets and into the producing end where value originates. Money is derived in a capital market economy from labor.

For example: What is a mortgage? Thirty years of your labor. What is consumer spending? The fruits of your labor.  What are taxes? The spoils of your labor! We won’t have any money to spend if we don’t generate a healthy labor market. The Market System functions like this:  Work = production = consumption = distribution = investment.

Currently, “investment” is the only area fully functioning in the economic system (banks and investors who have been given large wads of taxpayer dollars). Limited liquidity is flowing through the other levels of the value chain. Supporting labor at its foundation is the most certain way to rebuild an economy and get the system back on its feet.

We don’t need another bank bailout-not even at the regional level. We need to support the nation’s largest employer directly. Small Business is simply too-big-to-fail. The big question is: What will resuscitate Small Business America?

Payroll taxes and health insurance costs have long been the bane of small business. For some inexplicable reason, small business pays 45% more than big business in employment taxes. Lowering these costs immediately and retroactively to the first of the year would relieve Small B of a continuing burden.

The cost of health benefits weighs smaller businesses down, especially in hard times. Many employers have opted for cheaper plans or dropped insurance altogether. The office of SBA Advocacy reports, “In 2007, small firm employees were almost twice as likely as large firm employees to be uninsured.” 

While cutting taxes and health care costs will help, these measures will not be enough to save the nation’s largest employer from collapse. Small business urgently needs capital.

Extraordinary Measures

Extraordinary times call for extraordinary measures. Credit is like oxygen for business. To remove small biz from the ventilator, thirty billion dollars of accessible credit would be a good start. Yet if banks refuse to lend, what is the solution?

The federal government needs to step in and rescue small business much the way they did for big business-through direct discounted lending. The Fed could create a Small Business Direct Lending Facility with 0-2% interest and ease of access to funds modeled on the same formula given to big banks.

Forget banks. Forget begging. The government has to step up to the plate and start Phase Two of the economic recovery - direct government lending to small business. Life support for the nation’s largest workforce. We did for the big banks; we did it for student loans; we can do it for small business.

What, you gasp? This is not capitalism? Neither is the three trillion dollar rescue for the too-big-to-fail institutions that rode to their glory on the backs of the nation’s middle class.

This is an urgent matter of life and death-the death of small business or its resurrection. Will we have a nation comprised only of Walmart megastores? Or will we save Mom and Pop and neighbor Joan.

We have created a socio-economic tragedy with the two-tiered bailout system-a socialized commercial banking system-where the too-big-to-fail institutions are given bottomless safety nets and long ropes of capital with which to hang themselves. All this is understood as necessary and vital to the health and welfare of the economy.

On the other hand, the remaining economy is left to die on the vine. We, ordinary entrepreneurial America, operate under “unfettered” capitalism. The big banks do not. (Not when they need a capital infusion, zero percent loan or backstop for bad investments-then they are glad for government intrusion).

The system of pouring money into the coffers of the nation’s largest banks has allowed capital to pool at the top. It has not trickled down, nor even dripped into ordinary hands. Without credit our financial system will not function. Credit is how we make payroll, buy supplies, expand, innovate, and generate revenues. Money must circulate in a capitalist economy. If it ceases to flow freely through all levels, the system is at threat of collapse-this time a collapse of labor and idea-driven entrepreneurs-the nation’s middle class.

Small Business America cannot compete on an even playing field with banking institutions that are given blank checks to suck wealth out of the system and lobby against any possible reform. Unfortunately the bailout was handled without lending or compensation restrictions from the start-leaving too little too late in the form of meaningless threats and clawbacks. No time to cry over spilt geld however. Rather, we must get the economic engine running again-by supporting its vulnerable workforce.

Democracy is about equal opportunity. We have abandoned our most cherished values to become a survival-of-the-luckiest economy. We must turn that inequity around and support the rock that big banks are built on-depositors and taxpayers. Translation: The Working Public.

We can’t lend directly to small business, you say? It would be unthinkable? As Joseph Stiglitz points out- capitalism in America was irrevocably changed with the bank bailout. The old rules no longer apply.

Too much money, you say? We can’t afford it? Princeton professor and economist Paul Krugman claims to stop spending would be “pure disaster.”

I seem to remember somewhere a guarantee by our forefathers to “life, liberty, and the pursuit of happiness.” Fighting with a bailout-out bank, capitalized with your taxpayer money, to give your business credit and stop foreclosure on your home is futile and unfair. It is more than unfair; it is undemocratic.

We are all born equal under the law; it is high time America’s economic system reflects that God-given right. Because after all, the nation’s largest employer is simply Too-Big-To-Fail.


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Monika Mitchell is the Executive Director and Editor-in-chief of Good Business International, Inc. (GoodB). She writes regularly for the Good-B Blog.