Small Business, Big Manufacturing And Job Creation -- The Banks Aren't Lending

Banks still aren't lending where its needed, and it's getting worse, not better, for small businesses - the nation's jobs engine. Why did we bail out the big banks, again? Perhaps our government should just loan directly to the job creators instead of the job killers.

A CNN report this week: Banks pull another $1 billion from small business lending,

The nation's biggest banks cut their collective small business lending balance by another $1 billion in November, according to a Treasury report released late Friday. The drop marked the seventh straight month of declines.

... 10 of the 22 banks have cut their small business balances every single month since April. That list includes firms such as JPMorgan ... that are now posting monster profits. ... JP Morgan said its compensation expenses rose 18% during the year to $26.9 billion, much of which will be distributed as bonuses.

This chart from CNN's story shows the problem:

• Represent 99.7 percent of all employer firms.
• Employ about half of all private sector employees.
• Pay nearly 45 percent of total U.S. private payroll.
• Have generated 60 to 80 percent of net new jobs annually over the last decade.
• Create more than half of nonfarm private gross domestic product (GDP).
• Hire 40 percent of high tech workers (such as scientists, engineers, and computer workers).
• Are 52 percent home-based and 2 percent franchises.
• Made up 97.3 percent of all identified exporters and produced 28.9 percent of the known export value in FY 2006.
• Produce 13 times more patents per employee than large patenting firms; these patents are twice as likely as large firm patents to be among the one percent most cited.

Recently President Obama cited the figure of small businesses creating 65% of all new jobs. And, confirming that, Again from the SBA,

Firms with fewer than 500 employees accounted for 64 percent (or 14.5 million) of the 22.5 million net new jobs (gains minus losses) between 1993 and the third quarter of 2008.
Continuing firms accounted for 68 percent of net new jobs, and the other 32 percent reflect net new jobs from firm births minus those lost in firm closures (1993 to 2007).

But not if the banks won't lend to them.

This isn't just a problem for small businesses. It is also a problem for very large businesses. In a November post titled, $140 Billion For Bonuses, Zero For America’s Future I described how US Steel can't get financing to complete the Clairton coke battery plant and concluded,

Wall Street and the financial economy are supposed to be to supporting the real economy by playing the role of middleman, connecting sources of money with companies needing that money to allocate capital where it is needed. ... That is their essential role in the economy.

But ... instead of playing a background role supporting the real economy Wall Street has been dominating the economy, influencing the government and running quick-buck schemes, creating bubbles, speculating up prices on commodities and generally running wild. ... But instead of fixing the system, Wall Street still is not allocating capital where it is needed. They are, however, taking huge profits and giving out huge bonuses.

Let’s make finance the servant of the real economy again, rather than its master.

Problem put simple: our government is helping the big banks, but instead of using the government assistance to lend, they are speculating and giving out huge bonuses. This is a disaster for the economy and for the public's faith in government and democracy.

The initial bank bailout was presented to Congress as an emergency so severe it required passage in 48 hours, would have no oversight and would be “non-reviewable by any court or any agency”. Of course, when it didn’t pass in 48 hours the economy didn’t collapse, but they did finally pass it because Congress apparently follows a higher law that says the big banks must get what they demand.

Along with the TARP bailouts there has been the AIG pass-through, allowing them to not mark the losses from their gambling to market value, bad debts have been guaranteed by the taxpayers, and money is lent to them at zero interest rates which they lend right back to the government at a higher interest rate! (These low rates are a tax on people with savings accounts, for the benefit of the big banks.)

This year's $150 billion bonus pool would, all by itself, go a very long way toward restoring jobs as well as faith in our government and economy, if only it were applied to the problem instead of handed out to already-wealthy people as bonuses.

It is time to change the situation and make the banks the servant of the economy instead of the other way around. If the banks won't lend the government has to either make them lend or start lending directly. Either way it is time to break up the big banks to reduce their destructive influence over the government and economy.

Views expressed on this page are those of the authors and not necessarily those of Campaign for America's Future or Institute for America's Future