Credit Crunch for Small Business

IS a credit crunch squeezing economic expansion in the United States?

The evidence may be anecdotal rather than statistically solid, but many small-business owners feel instinctively that the answer to this one is yes. They feel squeezed by either overzealous regulation of banks and thrifts, or overzealous enforcement of otherwise sensible regulations.

The problem has been most acute among the small-to-middling enterprises employing 50 to 100, which typically rely on bank lines of credit to smooth out the cash flow through the year.

Even those who have been in business for a number of years are finding their familiar neighborhood banker making tougher demands for collateral, detailed business plans, and tax information.

If I had all this, I wouldn't need the loan, some businessmen are muttering under their breath.

And if small businesses really are being squeezed, this has implications for the whole economy, because, as their owners love to point out, small firms are where jobs are created in America.

The spate of positive economic numbers out within the last couple of weeks notably did not indicate much improvement on employment: Payroll employment was up, but by a far smaller rate than is typical during a recovery phase, and unemployment was down, but largely because half a million people have given up looking for work. Some analysts are wondering whether we are having an economic recovery divorced from employment expansion.

But is freer lending what's needed?

William Brandon, president of the American Bankers Association, caught President Clinton's attention at the December pre-inaugural economic confab with his estimate that relaxed banking regulations could be expected to produce $86 billion in increased bank lending.

But Rep. Henry Gonzalez (D) of Texas, chairman of the House Banking Committee, is less impressed, and has written to Mr. Brandon to ask him to explain how he arrived at that figure.

The General Accounting Office has promised that by late spring, it will have issued recommendations for easing banks' paperwork, but Charles Bowsher, head of the GAO, has urged Congress to proceed with great caution. Likewise, consumer groups are hesitant to support any easing up on financial institutions.

Rep. John LaFalce (D) of New York, however, worries aloud that the "pendulum has swung too far," that concerns about the safety and soundness of financial institutions have gotten in the way of letting them do what they are supposed to do: make loans, which is not an entirely risk-free activity.

"Ships are safe in harbor, but that's not what ships are built for," he observed during a Monitor interview the other day.

LaFalce has introduced legislation that would create a secondary market in small business loans, analogous to the Fannie Mae program for home mortgage loans. A government-sponsored enterprise (GSE), it would have implicit financial backing from the government without making a direct draw on the federal Treasury.

In the tradition of cute names for GSEs (which also include Sallie Mae, which buys and sells students loans), LaFalce's brainchild would be christened "Velda Sue" - the Venture Enhancement and Loan Development Administration for Smaller Undercapitalized Enterprises.

It's a mouthful, but the concept is that if lenders could resell their small-business loans to investors, they would be more willing to make the loans in the first place, and entrepreneurs would be able to get credit they need to expand. LaFalce has been introducing this legislation every year for a decade but is hopeful that the concept will be "more palatable to Clinton" than to his two predecessors.

GSEs are not without their critics, who signal concern that a proliferation of them could lead to considerable cumulative drain on the Treasury if things went awry. Bankers have made positive noises about the concept but are clearly leery of anything wrapped with more red tape. But some Clinton administration officials are said to be interested in the idea. Laura D'Andrea Tyson, chairwoman of the president's Council of Economic Advisers, who has expressed concern about lenders' overcaution, told a recent

Senate Banking Committee hearing that the administration "should look very carefully at the securitization of small-business loans."