Someone’s recession is over. For example: “Goldman Sachs Group Inc. Chairman and Chief Executive Officer Lloyd Blankfein’s $19 million compensation for 2010, almost double the prior year, ended two years in which the firm’s top executives gave up cash bonuses.” [Bloomberg video] However, the recovery is far from improving Nevada’s dismal 13.2% unemployment rate. [DoL] Eric S. Rosengren, CEO of the Boston Federal Reserve recently observed, “The percent of the population employed in December was 58.3, close to the low of this cycle and below the 59.3 percent employed in July of 2009, when the recovery officially started. For context, the number was around 63 percent when the recession began. The recent stability of the employment-to-population ratio reflects the poor labor market performance of the current recovery. We are simply not generating enough jobs to reduce the number of unemployed persons. Nor are we, by the way, providing job opportunities for the so-called “discouraged workers” who have given up looking for work.” [BostonFed] Point well taken. There appear to be not one, but two, “recoveries.”
Over at Seeking Alpha, Charles Hugh Smith explains the disparity between media reports of economic success and what the average middle class American is feeling: ” The Grand Game has always been to engineer a rising stock market, sell to the middle class suckers and then go short, making a fortune as the bubble pops and the middle class loses the “sure bet.” Now that the middle class isn’t responding to the endless propaganda about how great the stock market is doing, then the Powers That Be are forced to trade between themselves–hence the low daily volume and high-frequency trading. The stock market isn’t about building middle class wealth, and the middle class seems to have finally figured that out. The equity market is all about concentrating wealth and managing perception – if the top 10% is doing well, then the bottom 90% are supposed to feel better about the whole thing, too, even if they are poorer by every financial metric.” [Seeking Alpha] (emphasis added) The hard truth is that only about 7% of the middle class owns equities or mutual funds. 91% of the securities in this country are owned by the people who are benefiting from tax breaks and loopholes which have very little to do with economic growth — outside their own financial sector.
Conservative economics columnist Tom Evslin explains, “The point is that the tax code is full of loopholes which are handouts to the rich. Closing narrowly-targeted loopholes should not be considered raising taxes by Republicans or Democrats. Closing these loopholes would be a very good indication of whom Congress is working for; loophole closing is the one easiest places to start closing the budget gap even though it certainly won’t get us all the way there. Welfare should be for the involuntarily needy. It can’t be for the middle class because we’re the ones who are paying for it anyway. It certainly shouldn’t go to the rich.” [FOC]
The mantra of No New Taxes is a thin veil indeed if it seeks to cover the egregiously low 15% taxation rate on hedge fund income. The hedge fund and private equity managers are doing quite nicely — thank you very much — but the wealth they are concentrating within their own sector isn’t trickling down anywhere, much less to small business owners seeking investment and lines of credit. Indeed, there is a re-distribution of wealth in this country and it’s safe to say it’s being re-distributed from working Americans into the coffers of the upper 2% of the nation’s income earners.
How did we get to the point at which former Reagan Administration Budget Director David Stockman would say, “Representative Ryan fails to recognize that we are not in an era of old-time enterprise capitalism in which the gospel of low tax rates and incentives to create wealth might have had relevance.” [CSM]
In March 2010, small business owners found that getting bank loans was becoming ever more difficult as banks required more documentation (and after the mess they made in the mortgage market, who wouldn’t?) and seemed more eager to lend to those firms with whom the bank already had working business relationships. [McClatchy] By January 2011 some small businesses were availing themselves of credit union loan services instead of approaching local banks: “We see banks pulling back, but in contrast, credit union portfolios are growing fairly strongly,” said Mike Schenk, vice president of economics and statistics with the Credit Union National Association. Credit union loans in the U.S. climbed 6 percent to $38.54 billion as of December 2010, the most recent data available, compared with the year earlier. In Illinois, loans by credit unions also rose by 6 percent over the same period to $895.9 million. At the same time, the total amount of commercial bank business loans outstanding has been on a steady decline throughout the Great Recession, falling 6 percent to $652.29 billion in 2010 from $695.25 billion in 2009. The latest data from the Small Business Administration show that banks in Illinois are mirroring that national trend, though to a lesser degree, with a 3 percent decline in business loans outstanding to $18.80 billion in 2010.” [Medill]
There are indications that some of the banks have noticed that when small business firms can’t get lines of credit from them, the credit unions are only too pleased to step in, albeit with less resources:
“The Small Business Jobs Act also created the State Small Business Credit Initiative, funded with $1.5 billion to strengthen state programs that support lending to small businesses. Only a handful of states have applied. While the government has done a lot to stimulate lending, still small business credit is far from robust. Banks both large and small are still taking a long time to make lending decisions – even though they have trumpeted the fact that they are actively seeking to help small businesses by granting them loans. Analysis of the 1,000 most recent loan applications on Biz2Credit has found that approval rates of the loan requests made by small businesses of big banks (banks having $10 billion in assets) has actually fallen from 10.6% in the 4th quarter of 2010 to 9.8% in the 1st quarter of 2011. Large banks have publicly stated that they are looking to increase small business lending, but the reality has not matched the press releases. At the same time, the loan approvals from smaller banks have gone up slightly from 43% in last quarter of 2010 to around 45% in first quarter of 2011. There are a number of reasons why small banks have increased their loan approvals, including the encouragement to make use of $30 billion lending pool, the fact that local banks are generally less stringent in their lending parameters and the fact that smaller banks derive much of their income from loan making.” [NJNR] (emphasis added)
Translation: We aren’t even close to the finish line, in fact, efforts to get banks to invest in small business would be more aptly placed closer to the starting line.
Once again, Stockman’s advice is terse and pointed: “For example, banks – which caused the 2008 economic and financial crisis – are enjoying profits once again as so-called “risk assets” reflate. Meanwhile, well-meaning members of the middle class intent on saving cash continue to get “savaged” (Stockman’s word) when they keep money in low-yielding savings accounts and rely on a dollar that continues to lose value.” [YahFin] Stockman’s prescription is for the FED to raise interest rates and to insure there will be no more bank bailouts.
The latter issue has been addressed in the Dodd-Frank Act in which large banking institutions are given a way to “unwind” without dragging the rest of the financial sector down with them (witness the Lehman Bros. debacle), but the former would cause all manner of gnashing of teeth on Wall Street. Stockman has a solid contention — so long as interest rates are kept artificially low Wall Street banks are essentially playing with free money thereby enhancing the tendency to create the casino atmosphere in the investment sector. What Stockman’s analysis doesn’t emphasize is that far from trickling down into the general economy, the banks are participating in a closed loop investment atmosphere in which their most profitable segments, such as the trading desks, are given the resources to use ( read: money to play with) at the expense of other phases of the banking operation that might, for example, generate small business lending.
The “utility” function, as Suzanne McGee described it in Chasing Goldman-Sachs, is now secondary to the “profit” function for banking institutions. Banks, realizing that the big bucks are to be made from the trading desks, put the resources such as money and top personnel into that side of the banking equation. Since small business lending is essentially small spuds, the level of resources directed toward that sector remains restricted. The Second Recovery, the economic recovery of small business in the U.S., won’t get traction as long as the crony capitalism and casino mentality described by David Stockman continues to prevail in political policy discussions.
Instead of allowing Wall Street interests to continue to dominate the discussion of the federal debt and deficits, it would be economically healthier to establish a few guidelines for the debate.
- We need to recognize that about 55% of our current deficit derives from the Recession of 2007-2008, [CBPP] and that since small businesses make up about 2/3rds of our total economy, it is necessary to address the interests of small Main Street businesses (as opposed to the interests of hedge funds and other elements of the financial sector which like to describe themselves as “small businesses.”)
- We need to differentiate between regulations that seek to diminish the tendencies on Wall Street to perpetuate the closed loop cycle of investment, i.e. Money Chasing Money, and those regulations which actually have negative impacts on small business lending policies.
- We need to discourage the efforts of Wall Street interests which would reinvigorate the closed loop cycle of investment practices. The efforts of the SEC, the CFTC, FDIC, Comptroller of the Currency, and the Treasury Department to oversee, regulate, and closely monitor trading practices that emphasize volatility over stability should be encouraged.
- We can, and should, restructure our tax system to close loopholes, restrict tax havens, reduce unnecessary corporate subsidies, and raise the level of taxation on purely speculative trading. To do the latter will require that we differentiate between the positive contributions of venture capital providers from those markets which are primarily or even exclusively speculative in nature.
- We need to encourage greater support for lending programs from the Small Business Administration.
- We need to support more legislation like S. 509, the Small Business Lending Enhancement Act.
- We need to oppose efforts by Wall Street interests to water-down or even repeal the provisions of the Dodd-Frank Act on financial reform, which includes provisions for systematically dismantling those financial institutions who think themselves “too big to fail,” and more oversight of derivative trading.
- We need to oppose policies and legislation that seek to divest American workers of bargaining rights, which have in our past created the Middle Class with the spending capacity to sustain a consumer based economy.
- We need to divest ourselves of the myth that if Wall Street is happy then Main Street must be also, until Wall Street opens the investment loop to perform its utility function for financial resource distribution more effectively.
In short, we need to reverse course from trending toward more of what David Stockman labeled “crony capitalism,” and closed loop casino trading, and to start re-emphasizing investment in Main Street business and commercial activities. Supporting small Main Street businesses supports increased employment, and generating employment increases revenues for government services — at the local, state, and federal levels. Perhaps when the Main Street dog stops letting its Wall Street tail determine its agenda we’ll see that Second Recovery.