From the Justin Fox, regarding House Republicans’ plan:
…that of the House Republican Study Committee, seems to be a joke. It calls for a two-year suspension of the capital gains tax to “encourag[e] corporations to sell unwanted assets.” But the toxic mortgage securities clogging up bank balance sheets are worth less now than when they were acquired. Meaning that no capital gains tax would be owed on them anyway. If you repealed the tax, banks would have even less incentive to sell them because they wouldn’t be able use the losses to offset capital gains elsewhere. Seriously, where do these people come up with this stuff?
Eric Cantor, the Republican chief deputy whip, has a more reasonable-sounding if still pretty vague plan to insure more mortgages rather than buy mortgage securities. ….
I’m in agreement with Justin that guaranteeing even more mortgages won’t be any better than the original Paulson plan.
My observation here is that the obstructionism of this group is either a manifestion of denial of reality, or a sheer indifference to the needs of their constituents — to the extent that House Republicans purport to represent small business Main Street.
Figure 2: TED spread, accessed on 9/25 from Bloomberg.
Small Business Struggling As Credit Dries Up
Posted By:Kenneth Stier, Sep 25, 2008
While most of the nation’s attention is focused on saving behemoth financial firms, small businesses are struggling to ride out a perfect storm of tougher credit conditions in a badly hobbled economy.
The result is that the finance sector’s woes — which has spawned new lending prudence — is exacerbating, rather than relieving, economic weakness.
Even government programs designed to help small business are falling down on their mandate just when they are needed most, says small business advocates.
“It’s always been difficult for small business but now it is become almost impossible” to survive, say Marilyn Landis, chairwoman of the National Small Business Association (NSBA). “Many factors are coming together to make this a perfect storm for small businesses.”
Until recently most small business owners could go to their local banks and get unsecured loan of $100,000 or more but those days are long gone.
In the past, owners could put up buildings or equipment for loans needing collateral; similarly service companies could post solid track records of positive cash flow.
But under sharply tightened lending standards these are no longer any guarantee to get needed funding.
Besides, with so much manufacturing having migrated offshore there is less equipment to use as collateral, and property values have plummeted around the country.
As a consequence, small businesses are now using bank loans — far preferable than relying on credit cards — is at a 15 year low.
Sixty percent of domestic banks reported having tightened standards on commercial and industrial (C&I) loans to medium and large firms, according to the Federal Reserve Bank’s July survey of senior loan officer’s opinion on their lending practices.
But for small firms, terms tightened even more. Lending standards to small firms were raised on C&I loans at 65 percent of banks, up from 50 percent in April.
Some 32 percent of small business survey by the NSBA said they were experiencing worsening bank terms, forcing many to use credit cards more.
That’s more convenient for banks—which can shift debt off their books to a handful of credit companies – but it subjects borrowers to higher rates and terms that can be changed at will.
In an August survey, 67 percent of small business owners reported worsening credit card terms—up from 57 percent in February.
All this has added to small business owners being “extremely anxious” about the prospect for recession, according to a recent NSBA survey, which found 79 percent anticipating a recession or flat growth at best.
“Even the perception of such limitations on small business sector translates into prolonging the recovery of the US economy,” says the survey.
This is critical because small businesses are responsible for 93.5 percent of net new jobs created in the US since 1989, according to the NSBA.
The trade association’s survey says near-term prospects for new net job is stagnant.
“It”s a tighter market, it means it takes a little longer, there is a more scrutiny, consumers have to jump through a few more hoops to get that loan,” says Tracey Mills, a spokesperson for Consumer Banking Association. “And it’s a good thing because banks just want to make sure that whoever gets the loan, will have the ability to repay.”
Co-mingled credit histories
One of those new tighter hoops is tighter scrutiny of credit scores.
But that particularly complicates small businesses because many owners’ personal and business credit histories are co-mingled, with the debt businesses normally have to carry pulling down overall scores.
Another indication of the freeze, from Thursday’s FT:
On Tuesday, the US Federal Reserve quietly admitted that it had been temporarily unable to calculate yield levels for non-financial commercial paper, issued by AA-rated companies for one to three months.
The problem, it seems, was a dire lack of activity; or, as Morgan Stanley says, “extreme levels of stress and illiquidity”. More specifically, while investors are still purchasing ultra short-term notes — say, for one or two days — on a massive scale, they are reluctant to buy instruments that last longer than a few days. That may be temporary (yesterday yield prices were apparently returning to the AA sector again although they were unusually high). However, even a temporary freeze is remarkable. After all, these non-financial companies typically have nothing to do with Wall Street or toxic mortgage debt.
In other words, the spreads are not just rising; at some maturities in some instruments, markets have disappeared, albeit briefly (for now).
Returning to the CNBC article, I found most startling this statement (I never thought I’d agree with a statement from the US Chamber of Commerce, but these are unusual times):
“Main Street and Wall Street are inextricably connected,” said Bruce Josten US Chamber of Commerce executive vice president, urging Congress in a letter Wednesday to act quickly on a bailout out package to stem further market damage. Failure to act, he warned, would make the harm already will in retrospect seem “only the tip of the iceberg because a lockup in credit markets will cripple Main Street’s ability to operate and threaten taxpayer jobs and income.”
See also this post, as well as
So if we end up delaying until households and small firms individually experience the credit crunch directly for the sake of ideology, well, we’ll know where to locate the responsibility.