Main Street in crunch

By Edgar Ortiz

For the AJC

While trends show the credit crunch has eased on Wall Street, the opposite is happening on Main Street where small businesses face a dwindling supply of loans and tighter credit standards. Curtailed access to credit for small businesses hampers job growth and the prospects of bringing down the all-time high unemployment rate the economy has endured during this long-running recession.

Tight credit to small businesses seriously impairs the prospects of a sustained economic recovery, further contributing to a deterioration of the job market now experiencing its worst performance in more than 60 years, as noted by Michael Elsby in a recent report to the Brookings Institution.

The current high unemployment numbers portray a challenging economic environment that casts doubts on claims that the economy is on the mend and on a path to recovery — while at the same time, the number of unemployed Americans still looking for a job six months or longer exceeds 6.7 million, nearly half the 14 million-plus on the unemployment roster. For many Americans, confidence that the recession has come to an end can’t take root as long as the unemployment rate remains above the
5 percent to 6 percent range.

There’s little comfort in the Fed’s latest pronouncements that the recession has come to an end, when nearly 10 percent of the national work force is unemployed. No other economic indicator seems more important to Americans than the unemployment rate. A recent poll of forecasters conducted by Blue Chip Economic Indicators describes an anemic job market with the unemployment rate remaining above 8 percent in 2012 and 7.5 percent in 2013. Although there are signs the economy is improving, the two-year outlook describes a tenuous path to a sustainable recovery.

This is a different recovery pattern from prior recessions where the economy usually recovers faster following a severe recession — than after a mild recession — due to the accumulated pent-up demand by consumers and businesses during the contraction.

While Wall Street banks celebrate record profits and the end of the recession, Main Street is experiencing a different reality with struggling businesses, high unemployment, declining demand, shrinking profits, drying cash-flow and tightening credit.

Although $700 billion of taxpayers’ money was pumped into Wall Street to help them weather the financial crisis, the U.S. Treasury failed to set the rules requiring them to channel some of those funds to help millions of struggling small businesses. It is not surprising that several TARP initiatives, lacking the backing from the banking sector, have failed to increase the flow of credit to small businesses.

There can’t be a sustained economic recovery if small businesses lack the capital needed to help them manage and grow their operations. Unfortunately, access to funds needed by small businesses continues being severely curtailed:

● The proportion of banks that tightened their commercial underwriting standards reached a 20-year high in 2009, according to a recent Senior Loan Officer Opinion Survey.

● Wall Street banks slashed their small business portfolios by 9 percent, more than double their 4.1 overall reduction in overall lending, during the 2008-09 period, according to the TARP Congressional Oversight Panel.

● Over half of the nation’s community banks, a major source of capital to small businesses, have reduced their lending, due in part to tighter oversight by bank regulators, according to a poll conducted by the Independent Community Bankers of America (ICBA).

Unable to secure credit to help fund their operations in what can be described as a “perfect economic storm” — depleted savings, underwater home prices, reduced credit lines, higher interest rates, drying cash-flow, customers not paying and bill collectors at the door — many businesses are forced to shut their doors.

Others, however, persist in their quest to live the American Dream and see great opportunities amid the chaos of the current economic crisis. This resilient group of business owners is our best hope to bring the economy out of its current slump. Our policies need to facilitate the flow of credit to them, today.

Small businesses generate two out of every three new jobs in the economy and represent more than 98 percent of employer firms in the economy. The fastest way to pull the economy out of its current slump is by creating jobs and small businesses provide the best option to accelerate job growth. The billions of taxpayers’ dollars in the TARP program need to be redirected from the big banks posting record profits on Wall Street to the rescue of the struggling small businesses on Main Street.

Edgar Ortiz is president and CEO of Strategic Analytic Solutions, an Atlanta-based management consulting firm that provides strategic planning, predictive analytics and credit risk management advisory services to small and midsize businesses. He can be reached at ortiz@strategic
analyticsolutions.com.