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When the Small Stuff Is Anything But Small :: February 25, 2010 :: Federal Reserve Bank of Cleveland home | news & media | careers | site map FEDERAL RESERVE BANK o f CLEVELAND A bout U Tours For the Public News & Media Com munit y D e velopm ent S tream ing Media Forefront M agazine Speakers Bureau I Our IRegion I Research I Ban kin g I Learning Center Savings Bonds Home > For th e Public > News and Media > Speeches > 2 0 10 > When th e Small Stuff Is Anything But Small [O SHRRE When the Small Stuff Is Anything But Small Additional Information Sandra Pianalto Y ou’re all p ro b a b ly fa m ilia r w ith th e fa m o u s q u o te "d o n ’t s w e a t th e sm a ll s tu f f —an d i t ’s all sm a ll stu ff." S om e d ay s, th a t's v e ry good a d v ic e to follow . P resident and CEO, Federal Reserve Bank o f Cleveland B ut in th e w o rld o f e c o n o m ic s, I h av e fo u n d t h a t s w e a tin g th e sm all s tu f f is o f te n e x a c tly th e rig h t th in g to d o -b e c a u s e p ay in g a tte n tio n to th e sm a ll s tu f f c a n h e lp you u n d e rs ta n d th e big stu ff. D ayton, Ohio So, w ith a p o lo g ie s to Dr. R ichard C arlson, w h o w r o te th e w o n d e rfu l b o o k on n o t s w e a tin g th e sm a ll stu ff, I w a n t to s p e n d so m e tim e to d a y ta lk in g a b o u t a s p e c ific s e c to r o f o u r e c o n o m y --s m a ll b u sin ess. So m uch o f th e public's a t te n t io n in th e w a k e o f th e fin a n c ia l crisis has b e e n fo c u se d on big b u s in e s s - -th e tu rm o il a t th e big b an k s, th e h e a d lin e s a b o u t c o m p a n ie s su c h as GM o r AIG, lay o ffs a t big firm s, an d so f o r t h - - t h a t i t ’s e a s y to f o r g e t th e c ru c ia l ro le t h a t sm all b u sin ess plays in e c o n o m ic g ro w th . I know it c o m e s as no s u rp ris e to you t h a t m an y sm a ll b u sin e sse s a r e u n d e r s tr e s s rig h t now . T he F e d e ra l R eserv e h as b e e n a c tiv e ly m o n ito rin g th is s itu a tio n , a n d w e h av e b e e n s te p p in g up e f f o rts to m a k e s u r e th e e c o n o m ic re c o v e ry d o e s n 't le a v e sm a ll b u sin e sse s b e h in d -- b e c a u s e , in tr u th , w e c a n 't h av e a fu ll re c o v e ry w ith o u t a h e a lth y sm a ll b u sin e ss s e c to r . Dayton Chamber of Commerce Governmental Affairs Breakfast February 25, 2010 See Also President Pianalto Says Small Business Key to Economic Recovery Print Storvf P O O y Selected Quotes (_DOC). y In my c o m m e n ts to d a y , I'll f ir s t s k e tc h th e o v e ra ll p ic tu r e o f w h e r e I s e e th e n a tio n a l e c o n o m y h e a d in g an d w hy th e e c o n o m ic re c o v e ry t h a t is u n d e rw a y d o e s n ’t f e e l like o n e . S eco n d , I w ill e x p la in how th e s e g e n e ra l e c o n o m ic c o n d itio n s a r e a ffe c tin g th e sm a ll b u sin ess s e c to r . Finally, I w ill c o m m e n t on th e ro le th e F e d e ra l R eserv e is p lay in g to h e lp th e e c o n o m y re c o v e r fro m th is e c o n o m ic crisis. Of c o u rs e , th e v iew s I e x p re ss to d a y a r e m y ow n a n d n o t n e c e ssa rily th o s e o f a n y o f m y c o lle a g u e s in th e F e d e ra l R e serv e S y stem . I. A Recovery that Doesn't Feel Like One L et m e b eg in , th e n , w ith th e n a tio n a l ec o n o m y . You k now w e h av e b e e n th ro u g h o n e o f th e m o st s e v e r e an d lo n g e st re c e ssio n s in o u r n a tio n ’s h isto ry . T h e re c o v e ry fro m th e re c e ssio n m ay also e n d up b ein g o n e o f th e lo n g e st in o u r h isto ry . In f a c t, it m ay ta k e y e a rs ju s t to g e t b a c k to th e le v e l o f o u tp u t w e e n jo y e d in 2 0 0 7 , ju s t b e fo re th e e c o n o m ic crisis b eg a n . S om e o f you m ay th in k I am b ein g to o p e ssim istic . A fte r all, w e sa w a s tro n g GDP g ro w th e s tim a te fo r th e f o u rth q u a r te r o f la s t y e a r-n e a rly 6 p e r c e n t a t an a n n u a l r a te . B ut I th in k t h a t fig u re o v e r s ta te s th e u n d erly in g s tr e n g th o f o u r e c o n o m y rig h t now . This is a c a s e w h e r e paying a t te n t io n to th e sm a ll s tu f f - - th e d e ta ils b e n e a th t h a t im p re ssiv e n u m b e r--re v e a ls a m o re c o m p lic a te d s to ry of http://www.clevelandfed.org/For_the_Public/News_and_Media/speeches/2010/Pianalto_20100225.cfm[4/29/2014 1:54:12 PM] When the Small Stuff Is Anything But Small :: February 25, 2010 :: Federal Reserve Bank of Cleveland w h a t is sh a p in g up to b e a g ra d u a l re c o v e ry . M ost o f th e th r u s t b e h in d t h a t im p re ssiv e f o u r th - q u a r te r GDP g ro w th fig u re o w es to a re b u ild in g o f in v e n to ry sto c k s, w h ich h ad b e e n c u t to th e b o n e an d co u ld no lo n g e r s u p p o rt e v e n a m ild e c o n o m ic re c o v e ry . O ver th e c o u rs e o f th is y e a r , I e x p e c t o v e ra ll g ro w th in e m p lo y m e n t and o u tp u t to b e on th e w e a k s id e fo r th e e a rly s ta g e s o f an e c o n o m ic re c o v e ry . F o r m an y A m eric an h o u se h o ld s a n d b u sin e sse s, th is is a re c o v e ry t h a t ju s t d o e s n o t f e e l m uch like a re c o v e ry . L et m e p o in t to tw o re a so n s w h y th is is so. T h e f ir s t is d u e to th e la rg e a m o u n t o f e x c e s s c a p a c ity t h a t h as a c c u m u la te d . As s p e n d in g d e c lin e d in th e re c e ss io n , firm s of all siz e s c u t b ac k , d ra s tic a lly in m an y c a se s. P aring dow n g e n e ra lly follow s a p a tte r n in b u sin e ss. You c u t e x p e n s e s , you trim y o u r o rd e rs fro m v e n d o rs, you le t in v e n to rie s w ind d o w n , an d if you m u st, you r e d u c e e m p lo y e e s ’ h o u rs o r lay p e o p le o ff. B ut a t th e s a m e tim e you n e e d to le a v e e n o u g h c a p a c ity so th a t y o u r b u sin ess c a n a c c o m m o d a te n e w o rd e rs w h e n th e y s t a r t rolling in. H unkering dow n isn ’t th e s a m e as s h u ttin g d o w n . This tim e f e e ls d if f e r e n t, h o w e v e r, d u e to th e d e g r e e o f p a rin g b ack . N atio n ally , th e m a n u fa c tu rin g c a p a c ity u tiliz a tio n r a te n o w s ta n d s a t o n ly 6 9 p e r c e n t- - its lo w e s t le v e l s in c e 1 9 8 2 . And in so m e sp e c ific m a n u fa c tu rin g in d u s trie s , c a p a c ity has a c tu a lly b e e n sh rin k in g , as s o m e firm s h a v e p a s se d th e tip p in g p o in t o f m a in ta in in g id le c a p a c ity an d h av e s h u t dow n p la n ts a n d c lo se d o ffic e s . Excess c a p a c ity is a d ile m m a fo r b u sin e sse s o f a ll siz e s. T h ey can m a in ta in c a p a c ity fo r on ly so long w ith o u t an u p tic k in sa le s , an d th e y ’re c o n fro n tin g a m a rk e t w h e r e d e m a n d is o n ly g ra d u a lly re c o v e rin g a f t e r having fa lle n o ff a c liff. In f a c t, a c c o rd in g to th e m o st r e c e n t su rv e y o f th e N atio n al F e d e ra tio n o f In d e p e n d e n t B usiness, o r NFIB (J a n u a r y 2 0 1 0 ), m e m b e rs c ite d p o o r sa le s as th e ir sin g le m o st im p o r ta n t p ro b le m . T h e l a te s t A m erican E xpress O pen P u lse S urvey also e x p re s s e s a sim ila r p e r s p e c tiv e . A v e ry slo w re c o v e ry in d e m a n d , w h ich tr a n s la te s in to low sa le s fo r m o st firm s, m ak es it f a r to u g h e r to m a in ta in id le c a p a c ity o v e r tim e . In th e su rv ey s, p o o r sa le s to p p e d ta x e s a n d g o v e rn m e n t re d ta p e as th e n u m b e r-o n e c o n c e rn , so you know th is is a se rio u s p ro b lem . O ne o f th e fo rc e s ho ld in g b a c k d e m a n d is th e c o n tin u in g high le v e l o f u n e m p lo y m e n t. In d e e d , p o o r la b o r m a rk e t c o n d itio n s p o se a n o th e r la rg e c h a lle n g e to th e re c o v e ry . T h ro u g h o u t o u r e c o n o m y , u n e m p lo y m e n t p e rsis ts as a h u g e an d b ro a d -b a s e d p ro b le m . T he c u r r e n t o ffic ia l u n e m p lo y m e n t r a te is 9 . 7 p e r c e n t- - a n d rig h t h e r e in D ayton, i t is 1 1 .8 p e r c e n t. O th e r n a tio n a l c a lc u la tio n s t h a t ta k e in to a c c o u n t d isc o u ra g e d a n d u n d e re m p lo y e d w o rk e rs --th o s e w h o h av e s to p p e d looking fo r w o rk a n d th o s e w h o a r e w o rk in g p a r t- tim e b e c a u s e o f p o o r jo b - m a r k e t c o n d itio n s --ru n as high as 1 7 p e r c e n t. T h e d u ra tio n o f u n e m p lo y m e n t is also a big c o n c e rn . A ccording to th e B ureau o f L abor S ta tis tic s , th e s h a re o f w o rk e rs w h o h av e b e e n w ith o u t jo b s fo r 2 7 w e e k s o r lo n g e r now s ta n d s a t 41 p e r c e n t- - th e h ig h e st n u m b e r sin c e th is s e rie s b e g a n in 1 9 4 8 . C learly, m assiv e lay o ffs c o n trib u te d to th e s e la rg e u n e m p lo y m e n t n u m b e rs, a n d f o rtu n a te ly , layoffs slo w e d m o n th s ag o . O ur c u r r e n t p ro b le m is a la c k o f jo b o p e n in g s. In f a c t, th e jo b -fin d in g r a te now s ta n d s a t a h isto ric low . B usinesses a r e n o t c r e a tin g n e w jo b s v e ry q u ickly, a n d w h e r e la b o r u tiliz a tio n is picking u p , e m p lo y e rs a r e sim ply re s to rin g hou rs t h a t h ad b e e n p rev io u sly c u t. L abor m a rk e t c o n d itio n s a r e a d v e rse ly a f f e c tin g all jo b s e e k e rs . As you m ig h t e x p e c t, le s s -e d u c a te d p e o p le a r e m o re likely th a n c o lle g e g r a d u a te s to b e u n e m p lo y e d , b u t su rp risin g ly , th e n u m b e rs sh o w th a t http://www.clevelandfed.org/For_the_Public/News_and_Media/speeches/2010/Pianalto_20100225.cfm[4/29/2014 1:54:12 PM] When the Small Stuff Is Anything But Small :: February 25, 2010 :: Federal Reserve Bank of Cleveland o n c e a p e rso n b e c o m e s u n e m p lo y e d , th e lik e lih o o d o f h aving a long u n e m p lo y m e n t sp e ll is v irtu a lly th e s a m e fo r b o th g ro u p s. W ith o u t a p ick u p in h iring, i t w ill b e h a rd to s u sta in g r e a te r c o n s u m e r s p e n d in g in th e e c o n o m y m o re b ro ad ly , an d w ith o u t m o re sp e n d in g , hiring w ill in tu rn re m a in s u b d u e d . T h e g r a v ita tio n a l p u ll o f th e s e v e r e re c e ssio n w e h av e e x p e r ie n c e d is s till r a th e r s tro n g , a n d I th in k i t w ill ju s t ta k e s o m e w h a t lo n g e r th a n u su a l b e f o r e w e s e e a m o re ro b u s t p a c e o f jo b c r e a tio n . So, to sum up, w h ile w e a r e likely now in a p e rio d o f re c o v e ry , it d o e s n 't re a lly f e e l m uch like o n e . All ty p e s o f b u sin e sse s a r e c o n tin u in g to s e e w e a k le v e ls o f d e m a n d - in o th e r w o rd s, th e y d o n 't e x p e c t to s e e a b o u n c e -b a c k in sa le s fo r q u ite a w h ile y e t. This in tu rn c r e a te s e x c e s s c a p a c ity , w h ich le a v e s b u sin e sse s h aving to d e c id e w h e th e r to m a in ta in o r s h u t id le p la n ts an d o ffic e s . In su ch an e n v iro n m e n t, firm s a r e b ein g c a u tio u s a b o u t n e w hiring a n d so u n e m p lo y m e n t p e rsis ts a t a high le v e l, w h ich in tu rn re s tra in s sp e n d in g . From an y p e r s p e c tiv e th is is n o t a p r e tty p ic tu r e , b u t it is e s p e c ia lly c h a lle n g in g fo r sm a ll b u sin e ss, so l e t ’s look a t t h a t s e c to r in a b it m o re d e ta il. II. The Small Business Sector T h e im p o rta n c e o f sm a ll b u sin e sse s to o u r e c o n o m y --e s p e c ia lly in th e e a rly s ta g e s o f a re c o v e r y --c a n n o t b e o v e r s ta te d . T h ey h av e g e n e r a te d 6 4 p e r c e n t o f n e t n e w jo b s o v e r th e p a s t 15 y e a rs . During th e in itia l y e a rs follow ing e a c h o f th e p rio r tw o re c e ssio n s, th o s e in 1 9 9 0 an d 2 0 0 1 , th e s tr o n g e s t e x p a n sio n in e m p lo y m e n t c a m e from v e ry sm a ll firm s --th o s e w ith less th a n 2 0 e m p lo y e e s.C o lle c tiv e ly , th e s e s ta tis tic s te ll us t h a t sm a ll b u sin e ss is in f a c t big b u sin e ss, an d its im p a c t is e v e n g r e a te r b e c a u s e it re m a in s o n e o f th e m o st in n o v a tiv e an d fle x ib le p a r ts o f th e ec o n o m y . It is m islea d in g to lum p all sm a ll b u sin e sse s in to th e s a m e b u c k e t. Even th o u g h th e y m a k e up n e a rly 9 9 p e r c e n t o f all firm s a n d a c c o u n t fo r j u s t o v e r h alf o f all p r iv a te - s e c to r e m p lo y e e s , th e r e is re a lly no su ch th in g as a ty p ic a l sm a ll b u sin e ss. D ep en d in g on w h e th e r it em p lo y s fiv e p e o p le , o r 5 0 , o r 5 0 0 , th e w ay a sm a ll b u sin ess fin a n c e s its e lf is likely to b e d if fe r e n t. T h o se on th e la rg e r e n d o f th e sc a le te n d to re ly m o st h ea v ily on b a n k c r e d it, fo r e x a m p le . T h o se on th e sm a ll e n d f re q u e n tly tu rn to p e rs o n a l c r e d it c a rd s , an d th e y o f te n p u t up th e ir ow n h o m e s a n d v e h ic le s as c o lla te r a l. B ut if I c a n m a k e o n e g e n e ra l s ta te m e n t, I w o u ld sa y t h a t sm all b u sin e sse s a r e u n iq u e in o th e r w ays t h a t m a k e th e m p a rtic u la rly v u ln e ra b le d u rin g h arsh e c o n o m ic tim e s like th e s e . It is f a ir to say t h a t m o st sm a ll b u sin e sse s a r e u n a b le to go to th e c o m m e rc ia l p a p e r, b o n d , o r sto c k m a rk e ts fo r fin a n c in g . Also, sm a ll b u sin e sse s a r e f a r m o re likely to b e e x p o s e d to p ro b le m s in th e r e a l e s t a t e m a rk e ts th a n a r e la rg e b u sin e sse s. This is b e c a u s e o f th e d ir e c t n a tu r e o f th e ir b u sin e ss, su ch as c o n s tru c tio n , o r b e c a u s e th e ir b u ild in g s fig u re m o re p ro m in e n tly in th e ir s h a re o f b u sin e ss a s s e ts , o r b e c a u s e th e ir p e rso n a l p ro p e rty is o f te n u sed to s e c u r e lin es o f c r e d it. And d o n ’t fo r g e t t h a t m o st c o m m u n ity b an k s, w h ich g e n e ra lly le n d to sm all b u sin e sse s, a r e a c tu a lly sm a ll b u sin e sse s th e m s e lv e s . For a ll o f th e s e re a so n s, th e d e te r io r a tio n o f r e s id e n tia l a n d c o m m e rc ia l p ro p e rty v a lu e s has h it m a n y sm a ll b u sin e sse s h a rd , an d m an y a r e fin d in g a c c e ss to c r e d it to b e e s p e c ia lly c h a lle n g in g th e s e day s. Now, le t m e sa y up f ro n t t h a t I h av e w o rk e d a t th e F e d e ra l R eserv e long e n o u g h to h a v e h e a rd b a n k e rs a n d b u sin ess e x e c u tiv e s d isa g re e a b o u t a c c e ss to c r e d it m an y tim e s b e fo re . And, as u su a l, th is is o n e o f th o s e s itu a tio n s w h e r e b o th sid e s a r e c o r r e c t- - u p to a p o in t. But th is tim e th e a m o u n t o f p assion e a c h sid e is bringing to th e ta b le is u n p r e c e d e n te d in m y e x p e r ie n c e . http://www.clevelandfed.org/For_the_Public/News_and_Media/speeches/2010/Pianalto_20100225.cfm[4/29/2014 1:54:12 PM] When the Small Stuff Is Anything But Small :: February 25, 2010 :: Federal Reserve Bank of Cleveland To g e t a c lo s e r look a t w hy a c c e s s to c r e d it re m a in s su ch a c h a lle n g e f o r sm a ll b u sin e ss, th e F e d e ra l R e serv e Bank o f C lev e lan d has b e e n c o n d u c tin g an e x te n s iv e o u tr e a c h p ro g ra m to h e a r th e v iew s o f sm all b u sin ess o w n e rs, c o m m u n ity b a n k e rs, a n d o th e r s ta k e h o ld e rs . O ne c o m p la in t w e a r e h e a rin g fro m sm a ll b u sin e sse s is th e ir d iffic u lty in o b ta in in g o r m a in ta in in g c r e d it on a c c e p ta b le te rm s . From th e p e r s p e c tiv e o f m an y sm a ll b u sin e sse s, c r e d it is e x tre m e ly tig h t. S om e b u sin e sse s a r e se e k in g to r e s tr u c tu r e e x istin g lo a n s b e c a u s e th e s e firm s a r e now fin d in g it d iffic u lt to m a k e p a y m e n ts on th e s e lo a n s. Beyond t h a t c h a lle n g e , so m e sm a ll b u sin e sse s a r e fin d in g th e ir b a n k m ay w a n t to c h a n g e le n d in g te rm s b e c a u s e th e b o rro w e r’s c o lla te r a l is no lo n g e r w o rth w h a t i t w as b e f o r e th e fin a n c ia l crisis. From th e b a n k e r ’s p e rs p e c tiv e , th e stru g g le s to m a k e p a y m e n ts an d d e c lin e s in th e v a lu e o f c o lla te r a l ra ise a la rm b ells, an d th e b an k s e e s m o re risk th a n it likes. H ere is o n e e x a m p le . A sm a ll b u sin e ss o w n e r in C in cin n a ti re c e n tly to ld us t h a t his le n d e r w as re a p p ra is in g th e e q u ip m e n t h e p u rc h a se d o n ly th r e e y e a rs ag o , lo w erin g its v a lu e by 3 0 p e r c e n t. W ith su ch a d ro p in c o lla te r a l v a lu e , th e f irm ’s a b ility to s e c u r e a rev o lv in g loan to c a rry it th ro u g h to th e high su m m e r se a so n w as s e v e re ly h a m p e re d . Now, th e c o m p a n y c a n 't g e t th e m o n e y it n e e d s to m a k e as m uch p r o d u c t as n e c e s sa ry , w h ich le a d s to lo w e r s a le s , w hich le a d s to p o te n tia l layoffs, an d w h ich m ig h t le a d to v io la tio n s of c r e d it te rm s d u e to lo w e r r e v e n u e g ro w th . And on it g oes. Now l e t m e te ll you w h a t b a n k e rs a r e saying. B ankers te ll us loan d e m a n d is w ay d o w n , a n d m a n y c o m p a n ie s a r e n ’t fu lly d ra w in g on e x istin g lin es o f c r e d it. T his a c tu a lly c o n firm s w h a t th e NFIB su rv ey r e p o r ts , n a m e ly , t h a t on ly 5 p e r c e n t o f th e ir re s p o n d e n ts c ite fin a n c in g as th e ir m o st im p o r ta n t b u sin e ss p ro b le m . In f a c t, 89 p e r c e n t o f th e ir re s p o n d e n ts in d ic a te d t h a t th e y co u ld o b ta in all of th e fin a n c in g th e y n e e d e d , o r th e y w e r e n o t in te r e s te d in b o rro w in g . B ankers also te ll us t h a t in c a s e s w h e r e th e ir sm a ll b u sin ess c u s to m e rs do w a n t to b o rro w , th e b u sin e sse s a r e sim p ly n o t in as good sh a p e as th e y o n c e w e r e th e y a r e e i th e r losing m o n ey , o v e r e x te n d e d , o r d o n 't h a v e a d e q u a te c o lla te r a l. W ith th e ir ow n c a p ita l p o sitio n s w e a k e n e d co m in g o u t o f th e fin a n c ia l crisis, so m e b a n k e rs a d m it th e y a r e h aving to "b u tto n dow n" on le n d in g s ta n d a r d s . From th e b an k e rs' p e rs p e c tiv e , th e r e is o f te n m o re risk th a n re w a rd o u t th e r e . It w ill c o m e as no su rp ris e to y o u , th e n , to h e a r t h a t th e q u e s tio n I g e t a s k e d m o re th a n an y o th e r th e s e d ay s is, "How c a n w e tu rn th is s itu a tio n arou n d ?" III. The Role of the Federal Reserve I h av e no c u r e -a ll s o lu tio n , b u t I do w a n t to d e s c rib e a fe w o f th e a c tio n s t h a t p o lic y m a k ers e i th e r h a v e b e e n ta k in g o r a r e c o n s id e rin g to c o p e w ith th is e c o n o m ic crisis a n d to p ro m o te a re c o v e ry . F irst, le t m e te ll you a b o u t th e a c tio n s th e F e d e ra l R eserv e h as ta k e n . I th in k i t is c le a r by now t h a t w e a c te d ag g re ssiv e ly to f o re s ta ll a to ta l sh u td o w n o f c r e d it c h a n n e ls a n d a d e v a s ta tin g e c o n o m ic c o lla p s e . H isto rically , th e F e d e ra l R eserve's m ain to o l fo r c o n d u c tin g m o n e ta ry p o licy to s u p p o rt e c o n o m ic g ro w th a n d p ric e s ta b ility h as b e e n a d ju s tin g th e f e d e r a l fu n d s r a t e - - t h a t is, th e r a te t h a t b an k s c h a rg e o n e a n o th e r fo r s h o r t- te r m lo a n s. In re s p o n s e to th e w o rs t fin a n c ia l crisis in d e c a d e s , w e lo w e re d th e f e d e r a l fu n d s r a te fro m 5 - 1 / 4 p e r c e n t in m id -2 0 0 7 a ll th e w ay dow n to e f f e c tiv e ly z e ro in D e c e m b e r 2 0 0 8 , w h e r e th e r a t e s till s ta n d s to d a y . B eyond th a t, as th e crisis u n fo ld e d , w e also c r e a te d an d im p le m e n te d a n u m b e r o f u n p r e c e d e n te d p ro g ra m s to p ro v id e http://www.clevelandfed.org/For_the_Public/News_and_Media/speeches/2010/Pianalto_20100225.cfm[4/29/2014 1:54:12 PM] When the Small Stuff Is Anything But Small :: February 25, 2010 :: Federal Reserve Bank of Cleveland liquidity to financial markets and to get credit flowing again. Collectively, these programs were crucial in helping revive the securitization markets, stabilize the housing sector, and extend credit to households and small businesses. One significant result of our actions is that our own balance sheet expanded enormously in the process--from roughly $900 billion before the crisis to approximately $2.2 trillion today. In other words, we have far more assets and liabilities on our books than we would in more normal times. We took these actions to rescue the entire economy, aiding businesses both small and large. Our policies are aimed at strengthening the demand for goods and services, the very factor that so many companies regard as their top concern. Yet the economy is anything but back to business as usual--and I expect the economic recovery to progress only gradually. These conditions, in my view, warrant exceptionally low levels of the federal funds rate for an extended period. I realize that some people are concerned that if we do not take steps soon to throttle back on the amount of monetary accommodation we have been providing to the economy, our aggressive policy actions could lead to inflation. This is a concern to keep in mind, but I do not see warning signs of inflation pressures on the horizon. At the Federal Reserve Bank of Cleveland, we monitor and produce future inflation predictors, and these measures remain at low levels. We have also worked hard to develop measures of inflation expectations, and those measures also continue to show that financial markets expect inflation rates to remain low over the next five years. Nonetheless, as the economy strengthens, there will eventually come a time when we will have to scale back the degree of policy accommodation. Because of the unusually large amount of excess reserves we have supplied to the banking system, the Federal Open Market Committee has been discussing the tools and strategies for removing our policy accommodation when the time is appropriate. I am confident that we have the necessary tools to adjust monetary conditions when the time comes to do so. The Federal Reserve also has responsibilities for banking supervision. In our capacity as a bank supervisor, we have joined the nation’s other bank regulatory agencies in issuing new guidance on small business and commercial real estate lending. What's really important about this new guidance, I think, is how it encourages bankers to work with their customers during periods of stress. Often, it is in the best interest of both the bank and the customer to restructure loans so they can be repaid in a reasonable period of time. I can tell you that in my Reserve Bank, our supervisors are not automatically criticizing a credit just because it has been restructured. We are trying to be prudent but reasonable in assessing bank managements’ handling of troubled loans. We do not want overzealous supervision to create additional problems for bankers and their customers. Another set of actions geared toward the small business sector is the potential role of other government and public programs. Let me turn to one of the more obvious sources of financing for small firms--loans guaranteed by the Small Business Administration. A persistent story among the businesspeople we have been talking with over the past month is that SBA loans are appealing in theory, but difficult to secure in practice. Often, the problem is just a matter of paperwork. Other times, it is a matter of borrowers not being able to find a banking partner to underwrite the loan. As it is currently structured, the overall scope of SBA lending is just too narrowly focused on start-ups and the scale of lending is too http://www.clevelandfed.org/For_the_Public/News_and_Media/speeches/2010/Pianalto_20100225.cfm[4/29/2014 1:54:12 PM] When the Small Stuff Is Anything But Small :: February 25, 2010 :: Federal Reserve Bank of Cleveland small to deal with the shortfalls in credit that small businesses are reporting. In total, SBA guaranteed credit accounts for only about 5 percent of outstanding credit to small business. The Administration, for its part, has taken steps to address this issue by proposing legislation to allow increases to the caps on certain kinds of SBA loans, as well as to allow for the refinancing of certain kinds of owner-occupied commercial real estate. The Administration has also proposed using $30 billion of TARP funds for community banks to use for small business lending. So while there is no cure-all solution, there is widespread awareness at the policy level that helping to find solutions to the challenges facing small business is vitally important to our recovery. We at the Federal Reserve Bank of Cleveland are fully committed to staying engaged in this effort. Conclusion Let me conclude my remarks by noting that the ability of the Federal Reserve to endure as a positive force in the economy depends in no small part on our institutional design. Having 12 Reserve Banks across the country puts us in a very good position to act quickly, thoughtfully, and decisively. We hear from our small and large business contacts about conditions on the ground. We get real-world input that we share at the Federal Open Market Committee meetings, where we set national monetary policy. To me, this is the genius of the "decentralized central bank." At a time when our nation faces unusual economic and financial challenges, it is important to know that the Federal Reserve was set up to be independent so it can focus on longer-term policy objectives while remaining accountable to the Congress and the American people. I believe it is vital that we retain that independence if we are to maintain public confidence as we work to promote economic and financial stability. We still have a long journey ahead of us. We are at the very beginning of what is shaping up as a shallow recovery, and its trajectory is uncertain. The small business sector has been one of the catalysts behind every economic recovery in our history, and it is the collective actions of thousands of business owners that drive our economy every day. Small business and Main Street are not "small stuff" by any means-instead, they are the real crux of our economy. Some may think the Federal Reserve is too big or too wrapped up in national concerns to be interested in whether or not a small business in Dayton can get access to credit, but our structure ensures we take these needs into account, and I want to assure you both personally and on behalf of my Bank that we are fully committed to listening, to talking, and to ensuring these concerns are heard. Since I began with a quote from Richard Carlson, let me finish with another one. Carlson once said "circumstances don’t make a person; they reveal him or her." When I talk to business owners across my District I see tenacity, determination, and a strong commitment to rebuild and prevail. We have a long road ahead, but every time I attend an event like this I am heartened by the drive and optimism I see. Careers | Diversity | Privacy | Terms of Use | Contact Us | Feedback | RSS Feeds http://www.clevelandfed.org/For_the_Public/News_and_Media/speeches/2010/Pianalto_20100225.cfm[4/29/2014 1:54:12 PM]
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