Tuesday, 22 December 2009

The heart of America and the need for a defibrillator

David Goldman in his blog is right about the recovery. Until small businesses thrive again, it will not happen. What is so severe in the current recession is how profound they have been impacted this time around.

Small business (firms employing 500 workers or fewer) accounted for 64% of net new job creation for the past 15 years according to a small independent government agency called SBA (Small Business Administration).

According to an article in The Economist, cities with small firms have done better in creating jobs for the last 20 years.

In this recession, it has been very ugly for the small businesses of America. The small businesses employing less than 50 employees have accounted for 45% of the job losses!

The heart of America is failing and the Obama administration need to find a proper defibrillator soon to help them out in this downturn.

With activity picking up for some, small firms are being savaged by the credit crunch. They cannot get credit. Credit card debt and home-equity credit have been reduced drastically by the banks and seriously impaired by negative equity.

In conjunction to the lack of credit, small businesses cannot rely on regional banks because these small banks are getting crushed by their difficulties with the commercial property bust.

The Economist in its December 12th issue highlights the current situation:
"Nearly 40% of outstanding small-business loans exposure are held by banks with the greature exposure to commercial-property risk. In 1993, the figure was only 11%. As commercial property losses grow, banks will be forced to curtail lending."

Yes, this time around it is worse than during the Savings and Loans crisis which led to the demise of 450 banks.

Since the beginning of the year, a massive number of these regional banks have gone bust:


List of individual banks which have failed since 2000:


Another 7 banks went down just on the 18th of December.

Lending for the small businesses of America is the key battle for the recovery.

Let's hope the US administration will find the right defibrillator this time around to jump start the heart of American economy.

On a final note, I wish you all a Merry Christmas!

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