STATEMENT
of the
Honorable Nydia M. Velázquez, Chairwoman
House Committee on Small Business
Full Committee Hearing: “Financial and Economic
Challenges Facing Small Businesses”
Thursday, November 20, 2008, 10 a.m.

Despite action taken by the Federal Government this September, the fallout from our nation’s financial crisis continues to grow. In the face of a collapsing housing market, tightening credit crunch and record unemployment, it is clear that the current course of action is neither stabilizing nor galvanizing the economy. This is particularly apparent within the struggling small business community.

Rather than trickling down, resources from the Treasury and the Federal Reserve are pooling--and stagnating--at the top. As a result, small businesses from tech startups to convenience stores are bearing the brunt of severely restricted lending. In a report released last month, the Federal Reserve found that 75 percent of domestic banks have tightened their small business loan standards. On top of that, 90 percent of respondents said they have upped the costs of small business credit lines. At a time when large financial institutions are enjoying Treasury handouts, it would only make sense for small firms--the backbone of our economy-- to receive comparable assistance. But unfortunately, even loans from the Small Business Administration are on the decline. In fact, SBA lending has dipped 50 percent in the last year.  

In today’s hearing, we will analyze the current conditions facing small firms, and evaluate what actions the Treasury and the Federal Reserve have taken to address those circumstances.  

Regardless of continued declines, positive steps have been made through the Economic Recovery and Stabilization Act. The Federal Reserve’s Commercial Paper Facility, for example, has succeeded in partially easing the credit crunch. But unfortunately, the Fed missed a real opportunity to help small firms when it chose to limit this provision to big businesses. As a result of that particular oversight, the small business credit markets are as frozen today as they were when the crisis began. To remedy this, we ought to look for a concept similar to what the FDIC is now doing for homeowners. Sheila Bair has outlined an innovative new plan for restructuring mortgages, and something similar might work for small business loans. 

Despite these instances of government ingenuity, implementation of the Recovery legislation has largely failed entrepreneurs. For example, the Treasury’s Troubled Asset Relief Program, or TARP, has done nothing to thaw the small business lending freeze. In fact, the banks benefiting from TARP have all but shut down lending operations. And while billions of dollars have been earmarked for big banks and AIG, thousands of small firms across the country have been forced to close their doors. 

Shutting small businesses out of stabilization efforts just isn’t logical. Current legislation, while not designed as a stimulus per se, was intended to do more than simply steady the markets-- it was expected to help jumpstart the economy. Because small firms are proven drivers of economic growth, it only makes sense to give them the tools they need to spark a recovery.

Our financial system is entering an era of unparalleled turmoil and confusion. But amidst the upheaval, one thing has become abundantly clear--we cannot rely on the policies of the past. It has been said before that extraordinary times call for extraordinary measures. Well, these are certainly extraordinary times. If we are to match them to our measures, then we must take a page from the entrepreneurs’ playbook. Through ingenuity and resourcefulness, we can find innovative new ways to give small businesses--and the rest of the economy-- the resources they need to get back on track.