Small Businesses
Democrat
Ishan Seth
Rutgers Model Congress
Churchill JHS
9th grade
As we all know, the nation is experiencing an economic downturn. With faulty
loans, sub prime mortgages and bank runs, the result is severe repercussions on small
businesses. Some of these problems may include job losses, low housing markets and
small businesses that are unable to get loans for their companies. Bank loans have been
the essential core for small business’ expansion and productivity. With more restrictive
loans, it has been harder for small businesses to grow. Without small business growth,
jobs get cut, which lowers consumer spending, which in turn reduces demand for goods
and services that small businesses produce. In essence, without the access to credit, a
vicious cycle from consumer to seller creates a down spiral towards a severe financial
crisis. Small businesses, in there wholesome effort of becoming prosperous, render
unsuccessful due to the irresponsible decisions that the banks have made. Before we can
attempt to answer the question as to how congress can help, we have to understand what
got us to the credit crunch. Owning a home has been at the core of the American dream
since this country was established, but turning a beautiful dream into a nightmare got its
start with the Community Reinvestment Act (CRA) of 1977. It lobbied to increase
homeownership through ―creative‖ financing which was a genesis of today’s sub prime
mortgage trend. It encouraged sub prime mortgage lending by issuing credit to low and
moderate income households. Then in 1994, the Clinton administration in cahoots with
60 national housing organizations signed the National Partners in Homeownership in
1994 to increase nation’s homeownership rate through ―creative‖ financing methods for
mortgage origination. These two acts led to the acceleration of an artificial housing
euphoria in the United States. Coupled with lax Regulatory Environment with virtually
no enforcement by any government authority, all kinds of people with good and bad
credit started to take massive amounts of loans, a lot of times beyond their means, to fund
their home purchases. Consumers at all levels had seemingly limitless access to credit
which led to unchecked borrowing and lending on behalf of the banks. Once the real
estate market turned, this was a recipe for disaster. To get credit flowing again, Congress
needs to intervene.
Here we are today, in 2008 with real estate market in shambles, mounting job
losses, runaway home foreclosure rates, failing small businesses and an economy in
―Great Recession‖. It is the congress along with the other key players that can help us get
out of this mess. The Obama Administration and the Federal Reserve have a majority of
say in the decisions that will take place to fix this situation. These political actors will
help alleviate the affect that this recession has put on small businesses. Since the problem
has reached unprecedented magnitude and scale, it really requires congressional
intervention to solve the problem. The government should take control of the nation’s
primary housing lenders, Fanny Mae and Freddie Mac, as it did in September 2008. Due
to widespread Credit defaults, the values of banks’ portfolios have been battered. The
banks have reacted by freezing credit to small business. Small business’, on the other
hand, are also not jumping up and down for loans as there businesses are suffering. To
ease this impasse, credit needs to flow and flow cheaply. The first step has to be for
Congress to all takeover Bank’s bad loans or their ―Toxic Assets‖. In doing so, Banks
Capital Ratios will improve allowing them to unfreeze credit. Congress enabled its
Emergency Rescue of troubled financial institutions with the Tarp Act in September act
of 2008.
Furthermore, interest rates need to be lowered so the small business’ can be back
to pick up available loans cheaply for their expansion and job creation. It will also ensure
market confidence—after banks get some money back in the system and the credit is
somewhat flowing at cheap rates, consumers will begin spending again. Also, the
government should avoid putting a cap on compensation for senior members of
management of these banks. In their knee-jerk reaction, there will be a counter effect on
what there trying to do. If they put the cap on the talent, the senior managers will have no
reason to stay. Although this sounds politically explosive and contrary to common sense,
it will retain the talent that the banks need to execute this turn around. The tax payers’
money is at stake, so there should be strong oversight/supervision through regulatory
bodies, but the rescue plan still has to be executed masterfully. The lending institutions
need to be regulated by retaining talent which will help recover the spiraling market and
terminate the heads of organization that allowed such erosion under their watch.
In conclusion, the federal government needs to take care of three key players of
this mess: the banks and their employees, small businesses, and consumers—the ultimate.
If the above action plan is followed, and market forces are allowed to play, then we will
start seeing recovery soon.
Works Cited
Elliot, Larry. ―Credit Crisis – how it all began.‖ Guardian Club. April 6 2009.
http://www.guardian.co.uk/business/2008/aug/05/northernrock.banking
Krugman, Paul. ―Credit Crunch.‖ NY Times. April 5, 2009.
http://krugman.blogs.nytimes.com/2008/02/04/credit-crunch/
Murphy, Robert. ―An Economist’s Explanation of the Credit Crunch.‖ April 5, 2009
http://www.moneyweek.com/news-and-charts/economics/an-economists-explanation-of-
the-credit-crunch.aspx
Jubak, Jim. ―How Far Will Credit Crunch Spread?‖ April 4, 2009
http://articles.moneycentral.msn.com/Investing/JubaksJournal/HowFarWillTheCreditCru
nchSpread.aspx
Treanor, Jill. ―Credit crunch: Banks' results likely to focus on fragile balance
sheets.‖April 5, 2009.
http://www.guardian.co.uk/business/2008/jul/28/banking.creditcrunch