Taking the TARP in Stride

Small businesses (firms employing 500 workers or fewer) have accounted for 64% of net new job creation over the past 15 years, according to the Small Business Administration (SBA), an independent government agency.  Furthermore, studies show that cities with a high number of small firms have created significantly more jobs over the last 2 decades. But most recently, America’s small business have been hit where it hurts. The smallest of small businesses, those employing fewer than 50 workers, making up almost one-third of working Americans, have accounted for almost 50% of the job losses due to recession. Providing enough support to shore up these businesses has been tougher than anticipated.

The tax benefits included in the stimulus package (capital gains tax exemptions and business expense claim options) have had a disappointing impact.  Bills designed to target the flow of credit to small business, cut fees and provide guarantees for major SBA lending programs were also futile in rekindling demand and accelerating job creation. But as the U.S. economy rebounds slowly, demand for small business loans is rising. In November, remaining stimulus funds dried up, sparking concerns about a new credit crunch, especially with diminished ability of business owners to back loans using credit-card debt and home-equity credit.

Small businesses are further crippled by the looming burst of the commercial property bubble.  Although that bust has not caused the same public uproar as the housing implosion, the Economist asserts that nearly 40% of outstanding small-business loans are held by banks with the greatest exposure to commercial-property risk. As those risks and losses increase, bank lending will be further restricted.
So, on December 8th President Obama announced a proposal to aid job creation using some of the unspent TARP funds that were originally allocated to support ailing banks. Besides supporting employers and employees of small businesses, unspecified amounts will be put toward infrastructure and rebates for home insulations and other energy-saving incentives.  The majority of these measures are the remains of previous financial stimuli designed to cut taxes and create jobs for small business.

Ironically, these loan programs will not save regional banks that are going under. Offering more money to cover fee reductions and guarantees on small biz loans is just half the battle. Perhaps giving some of these funds to the banks would better appropriate the funds to all the players involved in the loans.