Among the issues most commonly discussed are individuality, the rights of the individual, the limits of legitimate government, morality, history, economics, government policy, science, business, education, health care, energy, and man-made global warming evaluations. My posts are aimed at intelligent and rational individuals, whose comments are very welcome.

"No matter how vast your knowledge or how modest, it is your own mind that has to acquire it." Ayn Rand

"Observe that the 'haves' are those who have freedom, and that it is freedom that the 'have-nots' have not." Ayn Rand

"The virtue involved in helping those one loves is not 'selflessness' or 'sacrifice', but integrity." Ayn Rand

15 August 2011

Actions Speak Louder than Words: Obama Hates Small Business

For each of the last five months, the National Federation of Independent Businesses (NFIB) has found that the business optimism of small business owners has fallen.  With First Quarter 2011 GDP growth dropped to 0.4% and Second Quarter GDP growth presently said to be 1.3%, some earlier optimism that this never-ending Great Socialist Recession was showing some signs of recovery has vanished.  Indeed, it is not even clear that if price inflation were taken into account properly that the so-called growth of the first two quarters of this year was not really a contraction of the economy.  We may very well actually have had the second dip of this recession already.  The Manufacturing Index has also been very disappointing.  Real estate values show no sign of recovery and consumer spending is still limping along.

Every time Obama and the Democrats push to provide extended unemployment benefits to the unemployed, the states have to continue using much higher than normal unemployment tax rates on the employees of businesses.  My company's rate in 2010 and 2011 is 7.33 times higher than it was 2008, despite our never having let an employee go who was eligible to collect unemployment insurance benefits.  This is not an incentive to small businesses to hire more employees and makes it harder to keep the employees they have.  Being forced to let a good employee go is definitely an optimism killer when you are running a small business.

Small businesses are also hit by the increased costs and bureaucracy they will have to expect with ObamaCare.  The Dodd-Frank financial industry reform bill has especially cut them off from the big lenders with assets in excess of $100 billion.  The increased regulatory burdens imposed by Obama's EPA, FDA, FTC, DOD, FDIC, Consumer Protection Agency, the NLRB, and the restrictions on oil and gas drilling have been hardest on small businesses who cannot afford legions of lawyers to deal with the government bureaucracy.  When the FDA or DOD require a business to become ISO-certified as proof of quality controls, that cost is proportionally much greater on a small business than on a larger business.  This is a very real discrimination against small businesses and often has only cosmetic effects on real quality controls since the business owner and upper management in a small firm are much more likely to be on top of quality issues than the corresponding management is in a big business.  New FDA oversight of small food retailers and producers is another major cost escalator for many small businesses.  Since few people were dying of food poisoning, there is no significant benefit to this new Obama cost.

Falling demand has been the biggest problem for small businesses which are less likely to participate heavily in the export markets as the large multinational companies do.  There are better opportunities for profits and sales abroad in many areas than here in the U.S., thanks to the Obama administration economy-wrecking policies.  Small business owners are also very worried about the uncertainties caused by excessive government spending and the rapid increase in the national debt.  The more spending government does, the more it interferes with business activity.  Since 2001, the GDP has grown by 46%, but the national debt has grown by 146%!  The Federal Reserve bought about three-quarters of U.S. Treasury Bonds in 2009 and 2010, thereby increasing its balance sheet from $896 billion in August 2007 at the start of the housing bubble collapse to $2.9 trillion now.  This is clearly not sustainable, yet there is no end in sight to this method of "covering" the absurd spending of the government.  The excessive spending and debt both cause pressure of increased taxes or inflation in the near future.  Business taxes are already much too high.

While only about 8% of small businesses name access to credit as their primary problem in NFIB surveys, it is clear that the credit needs of many small businesses are not being met.  Interest rates were increased on many lines of credit, business loans, and business credit cards.  40% of small businesses attempting to borrow in 2009 were able to meet their credit needs, 10% had most of their needs met, 21% had some, and 23% had none of their credit needs met.  With the gathering worries of satisfying the Dodd-Frank finance reform bill, this situation is becoming worse as this recession drags on and on and on.  Small businesses commonly do not have the resources to last through multiple years of recession.  Banks are especially refusing to lend money to fill in cash flow problems.

Small business owners generally own real estate.  In the NFIB 2009 study, 95% had real estate.  The fact that most real estate has lost considerable value has deprived many small business owners of the collateral they would commonly use to secure credit.  13% of small business owners had at least one property worth less than what they owed on it.  The loss of property values has left many small businesses much more vulnerable.

Into this sorry picture of woes for small businesses, the Obama administration FDIC has been squeezing banks to loan less money to small businesses, which it regards as less credit worthy as a group.  On that they may be right, but as is the rule with government, the assessment is a one-size-fits-all assessment.  Main Street Bank of Kingwood, Texas specializes in small business loans.  Main Street Bank has a $175 million loan portfolio and 90% of it goes to small businesses.  Most of these businesses have annual revenue less than $1 million.  The average loan size is $100,000.  Main Street had a profit of $1 million in the Second Quarter and wrote off 1.25% of its loans as bad.  The failure rate of loans in the FDIC insured banks in the First Quarter was 1.82%.  The FDIC has not released the bad loan rate for the Second Quarter yet.  Government is slow.

Despite the success of Main Street Bank in its small business loan strategy, the FDIC slapped it in July 2010 with an order to increase its capital and reduce the proportion of its small business loans from 90% to 25%.  The bank was also ordered to hire another bank executive.  It had to sell a business and shrink its loan portfolio to meet the increased capitalization requirement.  This increase in capitalization was a large one, from 9.5% in June 2010 to 17.3% in June 2011.  As a result of this FDIC interference in their business, Main Street Bank is working hard to turn in its bank charter.  A new company is being set up, Ascentium Capital, which will have backing from a private group of investors and will no longer take customer deposits.  This business will not be regulated and will be able to continue to specialize in small business loans.  They plan to increase the loan portfolio to $500 million.

The reduction from 90% of Main Street Bank loans to 25% for small businesses, removed $114 million of small business credit from the market.  Now imagine this kind of thing happening all over the country as the FDIC goes from bank to bank and prescribes lowered small business loan exposure.  The impact on small business credit will be huge.  This is very important, because a large fraction of American workers are employed by small firms and much innovation occurs in these companies.  A lack of access to credit during an extended recession makes these myriad small businesses more likely to fail.  The Obama administration policy is clearly to subsidize and bailout big businesses, but to slash and plunder small businesses.

Interestingly enough, the Small Business Administration has been repeatedly cited for guaranteeing lenders loans at 85% of the loan for which the lenders are considered to be at high risk in 80% of SBA 7(a) loans.  Their loan failures run many times higher than those of Main Street Bank!  While their loans go to only 0.2% of small businesses, they have an outlandish failure rate of 19.4%.  Perhaps the Obama crew should be more concerned with controlling this loan failure rate than that of a private bank which knows its business very well.

That tendency to plunder small business could not be made more clear than by Obama's constant effort to raise taxes on those earning more than something between $200,000 and $250,000 a year.  His efforts to widen the death tax is another indicator of his evil intentions with respect to small businesses.  It is politically much easier to plunder small businesses than it is to tackle big businesses with their many savvy lawyers and lobbyists.  It is also easier to over-regulate small businesses.  Socialists do not like business owners and managers.  They are equated with labor exploiters, no matter how many goods and services they produce for free consumers and no matter how many jobs they may provide.  Obama and his crew of insiders are nothing if they are not true socialists.  Small businesses are made to pay a heavy price as a result of their present power.


LZsays said...

I'm surprised not to have heard a blog post from you about Alabama coal mine operator Ronnie Bryant who, back in July, 'went Galt' and told everyone "I'm just quitting."

‘I’m just quitting’: A scene right out of ‘Atlas Shrugged’ in Birmingham:

Charles R. Anderson, Ph.D. said...

That was an interesting event. I have not commented on many things recently that I would have liked to have since we have been operating with a very lean staff of scientists in my laboratory even while having a pretty good backlog of projects. The problem is that it takes time to train any new scientist I might hire and by the time I might have one trained, I have no confidence that the pulse of work we saw since March will continue. In fact, with the downward revisions of 1st and 2nd quarter GDP growth and the continued wrongheadedness of the Obama cabal, it will be surprising if we do not see a fall-off again in our incoming work. So, I am just working too many hours.