A Catch-22 in Small Business Lending

On June 9, Federal Reserve Chairman Ben Bernanke testified before the House Committee on the Budget. Chairman John Spratt (D-S.C.) and Ranking Member Paul Ryan (R-Wis.) were in attendance, along with many committee members from both parties. Bernanke fielded questions concerning the economic outlook of the United States, including specific ones regarding the issues facing small businesses and the measures being taken to address these issues.

A few committee members asked about the flow of credit to small businesses, wondering why small businesses have had trouble obtaining loans—despite all of the money given to the banking industry for the very purpose of providing loans. Bernanke responded that making loans available to deserving small businesses is a “top priority,” and that the Federal Reserve has been working with small businesses and banks to get credit flowing again.

Bernanke also noted that an underlying problem communicated by small businesses is the lack of demand for products, which makes sense given the current economic state. Additionally, Bernanke explained that this lack of demand contributes to the low number of new loans. He explained that small businesses need both the product demand and loans in order to grow, so simply making more credit available will not necessarily fix the problem.

Many committee members stressed that small business growth is essential to reducing unemployment. When questioned about his confidence regarding job creation in the private sector, Bernanke explained that job growth depends largely on whether businesses can obtain loans, which is why credit flow is so important to spur job growth.

When asked about additional measures that could potentially aid small businesses, Bernanke mentioned a small business-friendly tax policy, but reiterated the point that first, product demand must be present, and loans must be available.

Generally, Bernanke attempted to impress upon the committee the importance of a long-term plan to reduce the deficit in order to give the markets confidence.

—Melodie Bales, Office of Advocacy Intern