The president spoke his mind, asking for “an extraordinary commitment." No, he was not asking for more military recruits. He is expecting more than the ordinary from bankers.
President Obama made clear his intentions with bank executives on Monday, pushing for more lending to small businesses as part of his efforts to spur the U.S. economy and increase hiring.But small businesses are apparently not where the money is needed. The latest reading of the National Federation of Independent Business (NFIB) Index of Small Business Optimism was down, but business owners don’t see a lack of bank loans as a problem.
Twenty-nine percent of all respondents to the NFIB survey reported they have met their borrowing needs. Nine percent reported problems obtaining financing, which is one point lower than the previous period.
Why are small businesses not desperately seeking more financing? Because they have little reason to invest in their companies. In the survey, only 16 percent said they are making capital-expenditure plans for the next few months. Only 8 percent said the current period is a good time to expand facilities, and only 3 percent think the economy will improve.
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Policymakers at the U.S. Federal Reserve are also pessimistic. In a statement released by the Federal Open Market Committee (FOMC) this week, the Fed sees problems in the labor market “abating”, but expects economic activity to remain weak for some time.
The FOMC has not changed its stance on monetary policy since the start of the financial crisis last year. The effective federal funds rate, the interest rate banks pay on very short-term borrowing, remains near zero at 0.13 percent. Low interest rates have done little to get banks to lend more to businesses.
While both small-business owners and policy makers continue to see weak growth at best, the financial markets are much more optimistic. The Fed statement recognized this, stating, “Financial market conditions have become more supportive of economic growth.”
What do the markets know that others don’t?
Immediately after the Fed’s announcement, stock prices remained stable, the dollar climbed against the euro and Japanese yen, and prices of U.S. Treasury notes and bonds rose, lowering their yield.
The market trends for this year show the worst is behind us and an economic recovery has begun. The stock market – a leading indicator of economic activity – is up over 20 percent for the year, and long-term interest rates are 150 basis points, or 1.5 percent, higher. Higher prices for stocks are following better-than-expected profit reports from corporations, activity that always precedes economic growth.
The announcement this week that the last two major U.S. banking companies are paying back the federal government bailout money should indicate to policymakers that all is well. It is time to take the foot off the policy accelerator and let the banks get back to work.
If the president wants more for the economy out of small businesses, he should listen to their needs. Going back to the NFIB report, we find that when asked to identify the most important problem small-business owners face at this time, poor sales are cited most frequently, high taxes second and government requirements third.
Yes, the economy is weak, but the financial markets are forecasting a turnaround, and small business owners are clear about what help they need. Small businesses need the government to think less about lending and more about taxes and regulations.
Peter R. Crabb is a professor of finance and economics at Northwest Nazarene University in Nampa. He earned his doctorate in international and financial economics from the University of Oregon.