How the Economy Affected the U.S.

Introduction

In 2008, a recession throughout the industrialized world was suggested by several important indicators of economic downturn. Contributors to this downturn included high oil prices, high food prices, and a substantial credit crisis leading to the bankruptcy of large and well established investment banks as well as commercial banks in many nations around the world. This crisis has led to increased unemployment, and other signs of contemporaneous economic downturns in major economies of the world.

In December 2008, the NBER declared that the United States had been in recession since December 2007, and several economists expressed their concern that there is no end in sight for the downturn. The recession could be worst since the Great Depression of the 1930s.

Discussion

Credit cards, home equity lines, student loans, car financing: none come cheaply or easily in these credit-tight times. The banks, the refrain goes, just will not lend money. But it is not simply the banks that are the problem. It is also what lies behind them. Largely hidden from view is a vast financial system that serves as the banker to the banks. And, many lenders, this system is in deep trouble. The question is how to fix it. Most banks no longer hold the loans they make, content to collect interest until the debt comes due. Instead, the loans are bundled into securities that are sold to investors, a process known as securitization. But the securitization markets broke down last summer after investors suffered steep losses on these investments. So banks and other finance companies can no longer shift loans off their books easily, throttling their ability to lend. The result has been a drastic contraction of the amount of credit available throughout the economy. By one estimate, as much as $1.9 trillion of lending capacity-the rough equivalent of half of all the money borrowed by businesses and consumers in 2007, before the recession struck has been taken out of the system. Banking chiefs, who have come under sharp criticism for not making more loans even as they have accepted billions of taxpayer dollars to prop themselves up, say it is the markets, not the banks, that are squeezing American borrowers.

Small businesses are critical to the health of the U.S. economy. They generate more than half of nonfarm business gross domestic product, employ more than half of private-sector workers, and over the past decade have created well over half of net new jobs annually. Moreover, larger firms often begin as smaller firms that prosper and grow. If small businesses are to continue to provide major benefits to the economy, their access to credit is clearly a high priority. My statement today will address how the ongoing turmoil in the financial sector and the weakening macro-economy appear to be affecting small businesses' access to credit, while recognizing that the impressive diversity across both industry and geography of the small business sector makes it very difficult to draw too many general conclusions.

As you know, the ...