(
Disclosure: Diarist owns a small software company which provides technology and services to Main Street retailers and service-providers to enable them to manage their in-house credit portfolios and to provide third-party credit to their consumers.)
One of the biggest, and perhaps most underreported, travesties of the Wall Street bailout (which was, supposedly, to enable banks to maintain credit on Main Street, as we were told back in late 2008 and into 2009) relates/related to our government's myopic focus on the too-big-to-fail ("TBTF") banks at the expense of the smaller regional and community banks--the entities responsible for the lion's share of U.S. small business (historically, the greatest drivers of U.S. employment and economic recoveries) credit.
In 2009, the
TBTF's made a pantload of money while their smaller competitors on Main Street lost their shirts or struggled to tread financial waters. At the same time, the TBTF's (this is barely mentioned, even in stories about diminishing consumer credit lines, to this day) eviscerated their consumer credit lines by more than $1 trillion in 2009 (approx. 25% of all consumer credit lines, vaporized), with at least another trillion, projected by many, to be axed from consumers this year, taking down much (up to 50% of all outstanding consumer and small business credit) of the available credit to small businesses with these draconian maneuvers, as well.
I've posted many diaries on this subject, here, here, and here, to cite just a few examples. (Refer to the scores of links within those diaries for more information, and for supporting documentation on the claims made, herein.)
Additionally, and as is usually the case, when the MSM reports on money supply, deflation and inflation, they fail to account for the reality that available credit (i.e.: open credit lines, a massive portion of which are untapped; not credit which is actually utilized, which is what we do hear reported in the MSM), in this day and age of consumerism, is virtually one and the same with regard to money supply. (Generally speaking, when the money supply shrinks, deflation ensues; when the money supply increases, inflation follows. So, it may be stated that when available credit retracts, deflation follows; when available credit expands, inflation follows. As I've noted, as recently as the past 24 hours, the focus and concern by those in the know these days relates to deflation.)
Furthermore, while it's not a widely-known fact among much of the consumer public, the reality is that "percent of utilization", and/or the "utilization rate", of one's available credit lines is one of the most widely-used metrics in determining one's credit score. So, by definition, when one's credit line is cut or frozen, it's quite likely that the person's credit score will drop, too. (How many times have we read of stories in this community, alone, over the past couple of years, of individuals with perfect or near-perfect credit histories having their personal credit lines cut, for no apparent reason, by a too-big-to-fail bank?) This institutionalized effort, from a consumer credit perspective, of throwing out the baby with the bathwater, creates/created a rather vicious cycle.
It creates a brutal, cascading effect upon U.S. small business, of course. (Both directly and indirectly.) So, when I read articles like this, "SBA Lending Cliff Dives in June, Boding Ill for Employment," from Naked Capitalism, today, it's disconcerting, to say the least. (See below for the full article.)
Without going into too much detail herein, the fact is that ongoing government policies--which are not changing one iota as far as the current regulatory reform legislation is concerned--enable an uneven playing field for these much larger firms to overwhelm their smaller competitors (the folks responsible for providing credit to small business) in the marketplace. (An ongoing collapse in the commercial real estate market--also largely funded by regional and community banks--further magnifies this problem for Main Street financial services firms.)
Citing just a few of the many institutionalized inequalities between our country's largest (TBTF) banks and their smaller counterparts:
1.) The TBTF's maintain privileged access to the Federal Reserve's discount window, and (generally speaking) this enables them to receive better rates on the money that they borrow than their regional and community-based competitors.
2.) Further exacerbating the disparities between Wall Street and Main Street financial institutions, (and, another very underreported truth) is the reality that the larger financial services players (those with national--as opposed to state--charters), "export" their much higher interest rates on consumer credit from their headquarters' state throughout the U.S., as opposed to being subject to much more stringent usury laws in the respective 50 states in which they operate. In fact, and also generally speaking, the TBTF's charge more for their (now-eviscerated) small business and consumer credit lines than their smaller counterparts, as well.
3.) In line with rate exporting, noted in the paragraph above, this holds true for most other federal banking regulations which also trump legislation at the state level. It's all due to a federal banking policy known as "preemption," (IMHO, this reality, in fact, was made even more favorable for the TBTF's in the latest iteration of financial regulatory reform legislation currently before congress) whereby more lenient federal laws trump more stringent, better-enforced, state-based financial services laws.
(It should be noted, just by clicking on the links in the two paragraphs, above, that virtually all efforts failed to include these reforms in the current FinReg laws now being finalized on Capitol Hill.)
Obviously, as a byproduct of all of this inequality between the country's largest banks and all of the other players in the financial services industry, Main Street gets royally screwed. Once one realizes that (practically speaking) the manner by which our government favors the TBTF's over the rest of the credit-granting community--the smaller players that extend credit to Main Street--is, indeed, one of the greatest negative contributing factors to this country's unacceptably high, stagnating unemployment nightmare, it really makes one wonder where some Democrats' heads are in D.C., at least as it relates to our Party's chances come November.
And, if you doubt what I'm saying as far as the enormity of this counterproductive problem's concerned, I'd suggest you checkout the following from Naked Capitalism, today: "SBA Lending Cliff Dives in June, Boding Ill for Employment."
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(Diarist is authorized, in writing, by Naked Capitalism Publisher Yves Smith to reprint her blog's posts in their entirety.)
SBA Lending Cliff Dives in June, Boding Ill for Employment
Yves Smith
Naked Capitalism
Monday, July 12, 2010 12:26 AM
Distressing news continues to accumulate on the small business front. Smaller companies have been particularly hard hit by the downturn. Some of that goes with the terrain, since small businesses are more fragile than bigger ones. Nine of ten startups do not survive their first ten years. Even in typical recessions, banks cut off lending (or reprice it to make it much more costly) to smaller enterprises to a much greater degree than big businesses (these are often across the board decisions, hitting all customers of a bank that fall into a particular category now deemed suspect).
In this contraction, small businesses have had it even worse than usual. Not only have the cutbacks to in business loans been ever more severe than normal, but other sources have been strangled off as well. For instance, companies too small to qualify for loans against the business often rely on business credit card products targeted to them, where borrowings might cost, say, 9% to 14% annually. Some players like American Express have canceled entire categories of small business products; many other banks have slashed credit lines, even to borrowers with pristine records who made little use of them.
This pattern bodes ill for the economy. Small businesses not only employ roughly half the workers in the US, but they created 60% to 80% of net new jobs each year in the past decade. Their owners have not been feeling terribly optimistic, and their confidence ratcheted down in June. The Wall Street Journal reported on the latest survey by Discover, which highlighted a rise in financial stresses:
....rising concerns over temporary cash flow issues offset some improvement in the way small business owners see the climate for their own operations.
"Many small business owners are working harder than ever to make payroll, pay their bills and keep their businesses running," said Ryan Scully, a Discover director. "Last month, more owners reported increasing their spending, which is good news. However, if sales are lagging this month, it's possible that cash flow was more of an issue."...
In June, 29% of small business owners said they believe the overall economy is getting better, falling from 35% in May. Meanwhile, 51% said the economy is getting worse, steady from the previous month, and 16% see the economy as the same, up from 12% in May.
Reader Don B pointed out a New York Times business blog post that discussed how Small Business Association loans fell sharply in June as provisions to make programs more attractive to both borrowers and banks expired:
Total approved loans in the S.B.A.'s guaranteed loan programs fell to just $647 million for the month, down two-thirds from $1.9 billion in May, according to figures provided by the agency. It was the worst month for S.B.A. lending in years, perhaps decades. Even during the credit crisis that began in the fall of 2008 the S.B.A. approved more loan dollars than it did last month.
Bankers who work with the S.B.A. blamed the steep drop-off on the absence of stimulus measures that raised the guarantee level on general business, or 7(a), loans from 75 percent to 90 percent and also eliminated borrower fees on both 7(a) loans and so-called 504 loans, which are used primarily to finance capital investments such as real property. These provisions largely expired at the end of May....
Barry Sloane, chairman and chief executive of Newtek Business Services, a large S.B.A. lender that is not a bank, said that the lower guarantees meant that his company would itself have to borrow more money to make the same amount of loans. (A bank uses its deposits to fund loans; a non-bank lender has to find other sources of capital to lend.) The higher guarantee, he said, "is key to being able to lever borrowed capital."....
Mr. Sloane said that because loans are typically funded 30 to 60 days after they're approved, "if this continues, you're likely to see a lot of businesses that don't have funding in September and October."
Yves here. Christmas-related spending is a big boost for much of the economy; businesses need to buy supplies and produce/carry inventory in advance of Christmas orders. Limited access to funding in the runup to this critical selling season would be particularly damaging.
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Bold type is diarist's emphasis.
So, while we continue to provide numerous, massive-and-sometimes-downright-stealthy subsidies for Wall Street, and while we continue to subsidize big oil and other big business/corporate sectors during our Great Recession, programs for many bankrupt states and unemployment insurance extensions, along with funding initiatives to maintain basic life support for struggling small businesses around this country (the primary driver of our society's past recoveries), are allowed to expire?
For sane Democrats everywhere, I ask: What is the logic behind that?