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The Moore Principal: Straight Talk from Main Street


By Charles L. Moore, CPA (Lansing, Michigan)

Charles L. Moore, CPA

Charles L. Moore, CPA

The recent vote in the Massachusetts senate race was a cry for straight talk and real action, not the political speech that leaves the American people without jobs and small businesses without access to credit–the life blood for both. Immediate interventions are needed now before the second wave of the recession heads our way like the flow of raging water after a dam has broken. The American people know that the walls of the dam are on the verge of giving way, so let’s fix it before the waters begin to flow.

The so called “experts” contend that economic indicators persuade them to believe that we are in a recovery period and job growth is a lagging indicator of recovery. Well, the people on Main Street may not be able to survive until the lagging job indicator catches up with the other economic indicators. Therefore, the American people want Straight Talk and Solutions to the lack of jobs and credit issues facing them on Main Street.

What we need is a good-old-fashioned dose of competition in the form of a government-run bank that will lend to credit-impaired businesses. This is where the straight talk and the solution will cross paths. The clear problem is getting people back to work. Most politicians, economists, and academicians believe that small businesses will account for upwards of 95% of the new job growth that is needed to pull the country out of this recession. These experts assert that small business lending will be the catalyst for this improvement, but they have not found an efficiently innovative method to deliver those funds to the people who need it most.

The government has to lend directly to businesses similar to what was done in good faith for the mega banks when the world markets froze credit to them because of their instability. The federal government must likewise show the same faith in the small business community as they did for mega-banks in order to jump start the economic engine. There is an historical precedent for this action. In 1933, the FDR administration started Land Banks to lend to credit-impaired farmers when banks would not during the great depression.

We have the vehicle to get these funds on Main Street within weeks. This would require the Federal government to invest $45 to $60 billion dollars into this program. The FDIC, which has taken control of over 150 banks, can provide the infrastructure for this Job Creation Bank concept facilitating the lending process to start within weeks instead of months. The banks that the FDIC has taken into receivership and have not been able to sell provide the immediate vehicle to get these funds to the people that need them in an expedient fashion. The government can inject capital in these banks and lending can start immediately. Additionally, the government can set the lending criteria, therefore, ensuring that the people who need the funds can have access, thereby increasing public confidence on Main Street.

Why should the federal government institute the job creation bank concept?

  • The government has put $90 billion into extending the unemployment wages and benefits for the 5.5 million people who have exhausted the first 26 weeks of their benefits. This trend is likely to continue with the official unemployment rate around 10 percent and could possibly increase as public confidence erodes.
  • In January 2010, thirty-six states showed an increase in unemployment. State, local, and county governments will feel the effects of rising unemployment rates in the near future because their primary income sources of property, income, and sales taxes are on the decline. This is the result of the decrease in household income due to increasing unemployment.The lack of access to credit has devalued property throughout the country which in turn has caused a continued decline in property values–which equals a decline in revenue for most states. As disposable income declines, there are fewer funds to purchase goods, thus, declining sales taxes. This will likely require additional funds be given to state and local governments to prevent massive layoffs and governmental bankruptcies. This will cost the federal government an estimated $100 to $150 billions dollars.
  • With the economy in most states getting worse and the number of qualified borrowers in decline, the willingness to lend is also declining. The government’s pressures that have been placed on the Wall Street mega-banks, which hold over 50% of the nation’s deposits, have landed on deaf ears. Although the banks are showing large profits they are not out of the woods yet. They all have commercial real estate portfolios that are suffering from the economic downturn, which is preventing them from lending the funds that are needed to jump start the economy.
  • Because the large banks are not lending, services are being left to small community banks which are now regulated with the same tough standards as are all banks due to the economic climate. The problem is that banks with at least $1 billion dollars in assets make 33% of all the business loans under one million dollars. But they only represent 10% of all the deposit in America’s banks. President Obama’s first state of the union speech noted that he would inject $30 billion into community banks to lend to small businesses. Although this is a great suggestion, it will have limited effect because of three reasons:1) the banks are not too big to fail and cannot count on bailout funds from the government; 2) banks must adopt conservative lending practice to survive, therefore, funding community banks will have the same limited result as the mega-banks; and 3) the infusion of new funding will help strengthen community banks balance sheets, but fails to provide the needed access to capital that President Obama is aiming for because the banks already had the $30 Billions (or more) to lend. It was the higher credit standards that prohibit banks from making loans to small businesses, not the lack of available funding.
  • To date the federal government has used the SBA loan program to try to get the small business lending jump started. This approach is unsuccessful because the banks have increased their credit granting criteria for all loans including SBA loans which defeat the purpose. Therefore, the businesses that are in need of capital to maintain, grow and expand cannot qualify with new tighter standards. It should be noted the SBA is not a credit granting institution, it only provides guarantees for a percentage of loans it makes.

In conclusion, the federal government must fund these job creation banks to put the needed cash into small businesses and to give our largest job-creating machine a chance to work. If the businesses do not receive funds, unemployment will remain high and state and local governments will be further stranded. Let’s face it, if jobs are not created, funds for additional unemployment extensions, as well as assistance to state and local governments, will cost the Federal government three to four times the $45 to $60 billion needed to invest in the job creation banks to help jump start the economy.

The traditional channel to get funds to the market through mega-banks, community banks, or SBA lending will continue to be unsuccessful because their mission to maximize shareholder equity does not provide support to the people on Main Street. Furthermore, the concept of job creation banks is in the mission of the Federal Reserve Bank’s Charter. The charter notes, “…conducting the nation’s monetary policy by influencing the monetary and credit conditions in the economy in pursuit of maximum employment, stable prices, and moderate long-term interest rates…” as part of its mission. An effective way to achieve this mission is through job creation banks.

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