We did not fix the banking system, Columbia University economics professor Joseph Stiglitz told the well-heeled audience at the World Business Forum this week.
The Feds pulled the big banks back from the brink of oblivion, but left everyone else up a creek without a paddle. You know who the fortunate few are Bank of America, JPMorgan Chase, Wells Fargo, Citibank, Goldman Sachs, Morgan Stanley, Capital One, and American Express among others.
To remind you of the facts, these banks were rescued through three lifelines: capital, credit and relief from debt. In their emergency hours, they were liquidated with $700bn in capital. Toxic debts were allowed to be moved "off" books; the government bought billions of dollars worth of toxic securities and let other debt remain dormant on balance sheets for years to come. Thirdly, these banks have had access to Federal Reserve funds at near zero percent for the past two years while lending to consumers at rates of 18-29%.
Time to fire the whole crew at the Federal Reserve, Treasury, and National Economic Council! (Larry Summers--thank you for saving us the trouble.) According to Joseph Stiglitz, the Feds did not finish the job.
Big bailout banks are swimming in cash--cash that was supposed to fuel the rest of the economy. Instead these bloated money suckers use taxpayer reserves for foreign investment and speculation that bypasses everyone in the U.S. except the top tier of the financial system. Fortunately for big corporations, they are able to access credit and capital by issuing bonds and shares. Corporate and high yield bonds are fueling an otherwise anemic securities industry.
Yet where does this pooling of cash at the top leave small and medium-sized business? SMEs, supposedly the nation's primary job creators, have been stripped of access to capital and credit, and are overburdened with debt.
SMEs are dependent on bank loans for liquidity. Big banks are not lending to small and medium sized businesses, because they don't need to. They make more money with less hassle and less regulation on foreign shores and use U.S. Federal Reserve cash to do so. Smaller banks are unable to take the risk. Depressed real estate markets limit the source of traditional collateral SMEs use to support loans. The result?
According to Joseph Stiglitz, one of the world's most respected economists (and one of the few that predicted the credit crisis), this scenario has created two economies--one economy for big banks and corporations where money is circulating and the other for small and medium sized business where access to cash has been cut off.
My question is simply this: If SMEs make up 70% of the business economy in the U.S., and these businesses cannot access a basic staple like credit, isn't there another economic crisis rumbling beneath the surface of the "real" economy?
Stiglitz says yes, this is possible. One of six people can't find full-time work in the U.S. Long term unemployment hovers between 9-10% and continues to weigh heavily on economy. The professor believes that the federal government will have to jump in and lend directly to small and medium business to stimulate job growth and provide all-important credit CPR.
At Good-B, we have been suggesting this solution for awhile. We interface with small and medium-sized business every day. They are echoing the same thing with increasing frequency over the past 18 months. What are they telling us? We need access to capital, access to credit, and relief from debt. We need help!
I wonder if anyone out there is listening. Does anyone hear what Joseph Stiglitz, those of us at Good Business International, and all those small and medium sized businesses who have been abandoned by our banking system and thrown out to sea are saying? Small Business America is gasping for air! The recent small business bill is wholly inadequate to solve the problem. It will not give the banks enough incentive or ability to lend. Politicians continue to claim they represent smaller businesses. Yet little changes. The problem persists.
President Obama, Congress, state and city governments, large and small banks, bickering politicians"another economic catastrophe is growing--a credit crisis for every part of the economy that is cut off by the business air supply of credit and capital. This means 70% of the economic system in the U.S. is at risk.
So what can you do to make a difference? I invite small and medium sized businesses, professionals, entrepreneurs and anyone else to tell us your story. How are you doing in this economy? Make a short 30-60 seconds video and we will post it. Send us your comments and challenges on the current economic conditions and we will publish it. Perhaps together we can make a difference and have our voices heard.
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