Transcript Slide 1

The Great Recession, Conventional and Nonconventional Federal Government Responses
and their Impact on U.S. Small Businesses.
October 20-21, 2010
Urbino Italy
Giuseppe Gramigna
Chief Economist
U.S. Small Business Administration
[email protected]
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The Origins of the Financial Crisis: Housing
•Housing prices outpaced income.
•During the 2000- 2006 period, Housing Prices increased 13%,
while Disposable Income grew 4.5%.
Source: Standard & Poor’s , U.S. bureau of Economic Analysis and SBA calculations.
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The Origins of the Financial Crisis: Housing
Housing took a bigger portion of disposable income.
The Housing Price to Disposable Income ratio nearly doubled, from the 3.6 at
the end of 1996 to 6.9 during the first half of 2006.
6.9
3.6
Source: Standard & Poor’s , U.S. bureau of Economic Analysis and SBA calculations
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The Origins of the Financial Crisis: The
Financial Sector Assets
•Mortgages became a bigger portion of Financial institutions’
assets.
•During the 1990’s mortgages accounted for 25% of commercial banks’ total
assets. This ratio peaked at 32% during the first quarter of 2007.
Source: Board of Governors of the Federal Reserve System, Flow of Funds and SBA Calculations
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The Development of the Financial Crisis:
The Short-Term Credit Market
•Lack of confidence led to a contraction in interbank lending.
•Asset-backed securities increased rapidly during the 2005-2007 period.
•Product complexity and opacity increased the perceived risk of these assets.
•By the latter part of 2007 the market lost confidence in these assets.
January 07, 2009
July 08, 2007
Lehman Bros. bankruptcy
9-15-2008
Source: Board of Governors of the Federal Reserve System
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The Development of the Financial Crisis:
Risk Premiums
LIBOR: interest on interbank lending.
3-Month Treasury: Interest for safe investments.
Lehman Brothers
collapse
Source: Board of Governors of the Federal Reserve and Moody’s Economy.com.
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The Development of the Financial Crisis: The
TED Spread
Financial sectors’ risk premiums rose sharply.
Source: Board of Governors of the Federal Reserve, Moody’s Economy.com, and SBA calculations.
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The Development of the Financial Crisis:
Credit Supply
Large Banks reduced credit (tightened standards) to
large and small firms.
Large firm focus
Less Credit
Small firm focus
More Credit
Source: Board of Governors of the Federal Reserve. Senior Loan Officer Opinion Survey on Bank Lending Practices
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The Financial Crisis and the Economy:
Real GDP
Real GDP declined sharply.
Source: U.S. Bureau of Economic Analysis
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The Financial Crisis and the Economy:
Utilization Rates
Utilization rates in the labor market and industrial sector
dropped dramatically.
Source: Board of Governors of the Federal Reserve System, and U.S. Bureau of Labor
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The Financial Crisis and Conventional
Government Intervention: Monetary Policy
Source: Board of Governors of the Federal Reserve System,
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The Financial Crisis and Non-Conventional Government
Intervention
•38 actions in total.
•32 actions for financial liquidity and asset price stability.
•6 actions to stimulate the economy.
•Extending $12 Trillion in support, about 86% of GDP.
Expected to cost $1.6 Trillion dollar, about 11% of GDP.
Source: Alan S. Blinder and Mark Zendi, "How the Great Recession Was Brought to an End", July 27, 2010
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The Financial Crisis and Non-Conventional
Government Intervention: The Fed
• The Fed intervenes to ensure liquidity and price
stability.
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Intervenes in Fixed Income and Equity Markets.
(1) Extends direct-lending to Primary Dealers in Equity Markets.
(2) Directly purchases equities of trouble financial institutions.
Guarantees assets of large financial institutions.
(3) Provides funding for the guarantees of large financial institutions
(BofA and Citi).
Enhances liquidity in Asset Baked Markets.
(4) Swaps (sells) "safe" treasuries for less liquid assets.
(5) purchases ABS of recent vintage.
Enhances liquidity in the currency markets.
(5) Swaps U.S. dollars for other currencies with other central banks
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The Financial Crisis and Non-Conventional
Government Intervention: Treasury, FDIC, FHA.
Treasury:
• Allocates newly approved Congressional funding to the various Federal
Agencies (Fed, FDIC and FHA, SBA, etc.).
Federal Housing Administration (FHA):
• Deploys additional funding for mortgage guarantees.
• Initiates mortgage foreclosure prevention programs.
Federal Deposit Insurance Corporation (FDIC):
• Increases individual account guarantee limit from $100,00 to 250,000.
• Guarantees bank debts.
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The Financial Crisis and Non-Conventional
Government Intervention: Congress.
Congress:
• Economic Stimulus Act of 2008: (Feb. 7): $152 billion to extend tax
rebates to low and middle-income individuals, and for accelerated
capital depreciation for small businesses.
• Emergency Economic Stabilization Act of 2008: (Oct. 3): $700
billion to establish the Troubled Asset Relief Program (TARP).
• American Recovery and Reinvestment Act of 2009: (Feb. 17):
$787 billion for tax incentives, social programs, infrastructure Investment,
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energy efficiencies and renewable energy investment, and small business
related programs.
Small Business Jobs and Credit Act of 2010 (June, 17) creates a $30
billion small business lending fund, provide $12 billion in tax breaks to help
small businesses, and provides $504 millions to SBA.
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Small Businesses in the U.S. Economy
• Broadly classified as firms with 500 or less employees;
• Employ slightly over half of the private sector employees;
• Pay about 44% of total U.S. private payrolls;
• Generate 64% of net new private sector jobs;
• Create more than half of the nonfarm private Gross Domestic
Product.
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The Financial Crisis and Small Businesses:
Employment
During the Great Recession of 2008-2009 employment
contraction was heavily focused on small firms.
Small Firm Focus
62% to 38%
Near Even Split:
45% to 55%
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The Financial Crisis and Small Businesses:
Employment (BLS and ADP Data)
The latest data from the private firm ADP indicates that
employment by small firms is slowly rebounding.
Source: U.S. Bureau of Labor, ADP, and SBA calculations
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The Financial Crisis and Small Businesses:
Sales and Earnings
Small firm sales and earnings dropped to historical lows
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The Financial Crisis and Small Businesses:
Capital Expenditure
Small firm capital expenditure plans also plummeted.
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Overview of SBA Programs
The three Cs of SBA:
Within Capital Access, SBA provides several core
financing programs for small business
SBA supports small businesses through three major
functions:
•Capital Access: credit & investment programs
Product Type:
Delivered through:
7(a) Loans
•Loan guarantee
program for new &
existing businesses
•Used for general
business expenses
•Up to $2 Million
•Nearly 5,000
banks and credit
union lenders
across the country
504 Loans
•Long-term, fixed-rate
financing (e.g. land,
buildings, equipment)
•Up to $2 Million
•+ 250 Community
Development
Corporations
(CDCs)
Microloans
•Smaller loans up to
$35,000
•Over 170 nonprofit
intermediaries and
CDFIs
SBICs
(Investment
Program)
•Debentures to
support private equity
capital, long-term, and
debt-security
investments
•Small Business
Investment Co.’s
•Privately owned
and managed
venture funds 21
•Contracting: increase access to federal
procurement for small business
•Counseling: technical support through Small
Business Development Centers, Women’s Business
Centers, and SCORE chapters.)
The Development of the Financial Crisis:
SBA
SBA loan guarantee volume declined
$1.7 billion Average
$1.4 Billion
$687 Million
Jan. 2009
Source: U.S SBA
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Government Intervention: The SBA
Component. Capital Access
• Increased funding
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ARRA of 2009: increased SBA funding by $680 Million, which led to $30 billion
in additional loan support.
Small Business Act of 2010: increased SBA funding by $505 million, which is
expected to support $14 billion in additional lending.
• Program changes
– Increased loan guarantees from 75% to 90%
– Reduced or eliminated fees
– Increased loan limits
• 7(a) and 504 loans from $ 2 million to $5 million ( 504 manufacturers
loans $5.5 million)
• Smaller, more flexible Express loans from $ 350,000 to $ 1 million
• Microloans from $35,000 to $50,000
– Increased pricing flexibility : Prime, + or Libor +
– New programs
• Motor vehicle dealer floor plan financing
• Refinancing of 504 commercial real estate loans
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Government Intervention: The SBA
Component. Capital Access
In cooperation with the Department of Treasury, the SBA
assisted in unfreezing the secondary market for SBA 7(a) loans.
7(a) Secondary Market Settled Value
$ Million
600
500
FY 2010 Avg.
$326 M
400
300
Monthly Avg. to
9/2008, $328 M
200
100
-
Source: U.S SBA
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Government Intervention: The SBA
Component. Federal Contracts
•SBA is responsible for ensuring that 23% of all federal
prime government contracts go to small businesses.
• As of August 31, 2010, 32.5% , $10 Billion, of federal
stimulus contracting dollars have gone to small businesses.
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Government Intervention and The Small
Business Component. Tax Benefits
• Tax benefits to increase investment and employment:
– Accelerated first year depreciation to 50% for 2008-20010 capital
purchases.
– Increased expensing limit from $133,000 to $250,000 (2008-2009) to
$500,000 for 2010-2011.
– 100% exclusion on capital gains taxes for purchases of small businesses
during 2009-2011.
– $1,000 new employee tax credit.
– Up to 35% tax credits toward employee healthcare premiums.
– Up to $10,000 start-up costs deductibility.
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