Conference on Euro discusses economic crisis

A conference on the Euro at the Peterson Institute for International Economics focused mostly on the economic crisis in the U.S. and the world. Lorenzo Bini Smaghi, a member of the Executive Board of the European Central Bank, emphasized that a solution for the entire world market, not just the EU or the US, was needed. When many markets are interconnected, a weak spot in one economy affects all of the economies, he said. He wanted to reassure banks that they will get all of the money they need so that they can start lending, fearing that the credit crunch will hurt the main economy.

Dominique Strauss-Kahn, the Managing Director of the International Monetary Fund, agreed that action is needed to be taken immediately to try to solve the crisis. He pointed out that confidence in the market is necessary to stop the credit freeze. Any action taken, said Strauss-Kahn, should have a clear objective, have oversight on how public money is used, should be comprehensive and coordinated with all actors at every level. He added that the action must also be acceptable for citizens. "We can solve the problem we're facing," said Strauss-Kahn, we just need to act quickly.

Credit crunch is just the beginning

“You have a real business oriented government...looking like a socialist country now, where all of the financial sector is going to be owned by the state at the rate that we’re going,” said Trillion Dollar Meltdown author Charles Morris.

Morris credits former Chairman of the Federal Reserve Alan Greenspan for much of the recent financial turmoil. In 2000, amid the dot-com bust, the U.S.’s Gross Domestic Product dropped considerably. In response the federal funds rate, the interest that banks are charged, was lowered to the point that it passed the consumer price index.

While the market rapidly picked up in 2002, the Federal Reserve did not adjust the funds to meet inflation over two years. As a result the banks were charged a disproportionately low amount of interest and took advantage of the misstep, essentially treating their loans from the Federal Reserve as free money.

“We have notion that the credit crunch is just the first step,” said Morris.

Credit crunch raises concerns on capital availability for small businesses

The House Small Business Subcommittee on Finance and Tax held a hearing on “The Effect of the Credit Crunch on Small Business Access to Capital” to hear testimonials from small business owners, an independent community bank representative, and a credit union representative.

Chairwoman Melissa L. Bean (D-Ill.) said credit is harder to access now for small businesses. David Schroeder, president of the American Enterprise Bank, speaking on behalf of the Independent Community Bankers Association, said that “the current turmoil in our economic and financial markets nationwide raises genuine concerns about the availability of capital and credit for small business.” He suggested several policy recommendations to “ensure small businesses lenders and borrowers have an uninterrupted supply of capital,” which included strengthening the Small Business Administration (SBA) loan programs and enacting the “Small Business Lending Reauthorization and Improvement Act.”

Carl Sorgatz, president of Hawthorne Credit Union, speaking on behalf of the Credit Union National Association, disagreed with the availability of capital being the chief obstacle for credit union business lending, but rather the chief obstacle is “the arbitrary statutory lending limits imposed by Congress in 1998 and the burdens associated with many of the SBA lending programs.” He said Congress can help small business owners using credit unions by enacting any of the bills currently pending that “promote greater credit union participation in small business lending.”

Lawrie Hollingsworth, president of Asset Recovery Technologies, Inc. and speaking on behalf of the U.S. Women’s Chamber of Commerce, said that because of the credit crunch, money is less available, and that when it is available, “it is at a new premium and cost for less money and more restrictive lending covenants.” She has seen businesses choose to under-insure themselves to save costs, which she feels guarantees failure in the event of a disaster.

Vanessa Baugh, president of Vanessa Fine Jewelry, said that that she and other small business owners have “soft collateral” and can not get loans from banks. She said this forces them to rely on equity in real estate they own. She asked the committee to “hold the line on tax increases” so small business owners have an opportunity to grow their businesses, while at the same time asking to “enact business-friendly initiatives such as tax incentives for businesses who want physical and job expansion.” Ranking Member Vern Buchanan (R-Fl.) also said that higher taxes on individuals would have a high impact on small businesses.