Why Bank Bailouts Haven’t Led to Jobs

Why Bank Bailouts Haven’t Led to Jobs

1:56 PM Monday July 11, 2011
by Jeff Stibel

Jeffrey Stibel is Chairman and CEO of Dun & Bradstreet Credibility Corp. and author ofWired for Thought. Follow him on Twitter at @stibel.

Given the recent economic news, I will go out on a limb and state that we are officially headed back into recession, or what can now officially be called a double-dip recession. Business optimism is at a record low, commodities prices have jumped to inflationary levels, home sales recently dropped to prices not seen since 2008, and job growth is anemic. We are just waiting for GDP data to confirm the inevitable. As Forbes reported, the Chairman of the Federal Reserve has admitted that he is officially “clueless on the economy’s soft patch.”

Things are a bit more convoluted than they were back in late 2008, when it became clear that the United States and much of the rest of the world was in a recession. It was largely believed that the recession was caused by reckless banks and a crisis in confidence. The result was reduced consumer spending, financial uncertainty, and a stark reduction in the number of jobs available. Congress was convinced that they must stabilize the economy by infusing big banks with capital. And infuse they did; to the tune of $700 billion. Almost three years later, many banks have repaid the loan (and have also posted record profits), yet by all accounts it appears as if we are sliding back into a recession. What happened?

When it comes down to it, economic recoveries depend on job growth, which is what the stimulus was intended to trigger. Banks were supposed to lend money to companies, who would in turn spend money to create new jobs, which would mean more employed people with money to spend, which ultimately would boost business revenues and create new jobs — a virtuous cycle.

But jobs haven’t really grown. For a few months in a row, we were thrilled to see 160,000 new jobs created per month. Unfortunately, these gains were largely illusory. The new jobs created weren’t steady, full-time, middle class positions. Instead they were part time, project based, transient, and low wage. Many can be attributed to a McDonald’s hiring surge. Even these low wage jobs are hard to come by — there were over one million applicants for the available 62,000 McDonald’s positions, making gaining employment at McDonald’s just as difficult as gaining admission to Harvard University. Numbers released earlier this month show what is probably a more accurate reflection of “real” job growth: only 18,000 new jobs created in June. Even worse, the Labor Department adjusted the May numbers downward to 25,000 — less than half of their initial assessment.

So I should modify my statement to say that economic recoveries depend on real job growth. Past downturns, including the Great Depression, triggered massive increases in new business creation. This one is different: since 2007, we’ve had a 23% drop in new business creation. In the same period, we’ve also suffered a net loss of 7 million jobs.

Job growth, as it turns out, is largely driven by small businesses. Typically this comes from new business creation that builds a small business economy that drives 64% of all jobs. But in order for small businesses to be created and hire during economic downturns, they need access to capital, which is often provided by big banks. This, of course, was a primary driver of the $700 billion in economic stimulus that went to banks but, as we have learned, it did not go to small businesses. And this is the primary reason why we are still in a recession.

Many thought that the $700 billion bailout was going to trickle down to small business owners. This didn’t happen. The banks took the money, invested it, earned a large return for themselves, and then repaid the government. The 22 largest recipients of the bailout actually reduced small business lending by over $59 billion through last year. Congress largely considers this program a success: they avoided a complete financial collapse and recouped a good portion of the money invested. But the economy desperately needed (and still needs) that money to circulate to small businesses.

During the recession, small business owners did what they could to survive — they tightened their belts, reduced their costs and cut headcount. Today, only 5% of business owners think it’s a good time to expand and very few intend on creating full time jobs (though 58% of employers say they plan to hire more temporary and part time workers). There are considerably more business owners who expect business conditions to be worse in six months rather than better. Even the businesses that are optimistic and thus inclined to secure financing are finding loans hard to come by. A recentPepperdine University study found that only 17% of small businesses who applied for loans were able to get them. It is no surprise that small business owners’ optimism has declined for three straight months and that only five percent of them think this is a good time to expand.

What’s the solution?

We must go back to the drawing board and figure out how to get cheap and convenient capital into the hands of small business owners. Stimulus money needs to be earmarked for small businesses. Banks that took loans from the government need to start spending on small businesses. This is as good for them as it is for the overall economy.

Some banks understand the mutual benefit and are starting to invest in small businesses of their own accord. Goldman Sachs is giving away $500 million to small businesses, with the stated purpose of unlocking small business “growth and job creation potential.” JP Morgan Chase plans to increase their small business lending practice to $10 billion annually. And Bank of America is increasing by $5 billion annually. Plans and pledges are important, but action is needed: the pledged money needs to be spent.

The funds must come with relative ease and favorable terms, just as it did for the banks who received a bailout. Many business owners say they don’t want loans because the terms are so stringent and the process is overwhelming. But if the terms are reasonable and the process is easy, few businesses would refuse an opportunity to grow.

Every recession in recent history has ended with job growth coming from small business creation… except this one. That’s why the recession is not ending. To end this once and for all, we must help small businesses help the economy by giving them easy access to capital from which to hire employees whom will ultimately be contributors to the overall economy.

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