William Dunkelberg
Professor of Economics at the School of Business and Management, Temple University (Formerly Dean of the Fox School of Business)
- Notes on the Economy – 02/22/11
- Notes on the Economy – 02/1/11
- Notes on the Economy – 12/25/10
- Notes on the Economy – 12/13/10
- Notes on the Economy – 10/14/10
- Notes on the Economy – 05/7/10
- Notes on the Economy – 09/17/09
- Notes on the Economy – 07/19/09
- Notes on the Economy – 05/22/09
- Notes on the Economy – 03/26/09
- Notes on the Economy – 03/10/09
- Notes on the Economy – 12/29/08
- Notes on the Economy – 06/30/08
- Notes on the Economy – 06/4/08
- Notes on the Economy – 04/24/08
- Notes on the Economy – 03/4/08
Notes on the Economy
June 23, 2011
- A headline in the Wall Street Journal (4/24 C1) read “An Uptick in Loans Could Aid Businesses”. This lead reflects the mistaken view pervading thinking on Wall Street and in Washington D.C. that a major reason for the slow economic recovery is that banks will not lend to (small) credit-worthy businesses. This argument is usually advanced by individuals who have never made a loan or had a private sector job. The argument is that if banks would just make more loans, all would be well. This view is at the core of Treasury and SBA programs designed to provide funds to banks who will promise to lend to small businesses (although the $30 billion being made available to these producers of half the private GDP is an insult, compared to the $50 billion tossed at GM which will soon produce a loss of tens of billions to taxpayers, share-holders, and bond-holders). We have forgotten already that all the jobs created by making bad mortgage loans are now gone.
“An uptick in…lending could help businesses expand and reduce employment,” says the report, reflecting the view that it is credit supply that is the problem. The banks mentioned in the article are all of the “biggies” who had, and still have, major loan-loss problems and pulled away from small business lending. Missing in the report are references to the thousands of community banks who did not get caught up in the “bubble” and are the mainstay of lending to Main Street firms. Yes, credit is harder to get now at these banks than it was during the bubble, and it should be. Underwriting standards were seriously compromised, and bubble prices overstated the true value of collateral.
That the real problem is loan demand was confirmed while speaking to bank organizations in half a dozen states over the past year. Loans have to be repaid, meaning that the money must be used to finance the acquisition of employees or equipment that will “pay back” the loan. This is common sense. But a record numbers of owners – as high as twenty-eight percent – have reported that “weak sales” is their top business problem, while only four percent have reported “financing” as the top problem (according to the National Federation of Independent Business’ monthly surveys of its 350,000 member firms). Ninety-three percent reported all their credit needs met in March, including fifty-three percent who said they were not even interested in a loan. Without customers, there is no need for a loan to finance hiring, inventory purchases, or expansion. Mere survival is not a good bank loan! But those in Washington D.C. do not get it. This lack of understanding produces bad policy, and there has been plenty of that. If lending is picking up, it is because there are customers, and thus a reason to invest and hire. The reverse doesn’t work – credit cannot be force-fed to the owners to cause more customers suddenly to show up. Even interest free loans have to be repaid! This is “pushing on a string”. Just ask the banks.
- One of the current administration’s goals is to make it much easier for unions to organize employees at our nation’s firms. “Card Check” was high on the initial legislative agenda: President Obama made a recess appointment to the National Labor Relations Board (NLRB) of a former lawyer for the SEIU, one of the largest financial supporters of the President’s election. Presidents of the SEIU and the AFL-CIO have been among the most frequent visitors to the White House, while ABC News reported that a number of the President’s Cabinet Secretaries had no directcontact with the President in the first two years of his term.
Then came Wisconsin. The tactics of the unions were on display: teachers abandoned their students; some teachers were dragged out of class to engage in demonstrations they didn’t understand. Doctors wrote bogus excuses so that teachers could be paid by taxpayers while they occupied the Capital building; outsiders were “imported” to join the demonstrations; local business owners were threatened if they didn’t support the union agenda. No small business stood a chance against such tactics, and ninety percent of all employer firms have fewer than 20 employees. The subsequent judicial and legislative elections have made it clear that people are fed up with such tactics; but the unions continue their pressure.
If one cannot get the necessary votes, there is always the regulatory route. In the view of its most recent appointee, the NLRB could impose “card check” even without congressional authorization. Now the NLRB has given Boeing’s union the power to decide where Boeing can make planes, instructing a judge to prevent Boeing from building planes in a new South Carolina plant outside of the Puget Sound area because it was “discouraging membership in a labor organization” and thus in violation of Federal Law (WSJ, Bloomberg, 4/20). Look at the control the teachers unions exercise – they, not the managers, “write the job descriptions.” Unions decide how many workers are needed to tighten a bolt, etc. Managers are losing the ability to define the jobs that need to be done, as more and more is dictated by the unions. Can this be good for American small businesses that can be destroyed by Wisconsin-style tactics? Apparently the Administration thinks so.