The best single thing that can happen for privately owned businesses is to have the economy get back into gear, meaning that both consumers and businesses get back into their normal patterns of buying products and services. Before addressing what it is going to take to cure the situation, let’s understand exactly what has happened and how we got into this mess. As most economic statistics indicate, starting in late 2007 and then accelerating into the last half of 2008 and into 2009, both consumers and businesses, stopped buying and simply elected to postpone virtually all postponable decisions.
Why postpone? The answer has two major components: the meltdown of the US credit system and FEAR of the unknown and what might be happening next. What has generated these two emotions? The entire US economic system (including consumers, businesses and major industries) has been shocked into realizing that the unimaginable is now an economic reality.
The heretofore unimaginable includes:
- Major Landmark US Investment Banking and Brokerage firms becoming insolvent
- Major Real Estate Mortgage firms disintegrating into insolvency
- Many US banks becoming insolvent and the Fed arranging shotgun marriages
- Banks sharply curtailing their normal lending practices
- 9%+ of US residential mortgages being either in default or foreclosure
- Total disappearance of secondary markets that heretofore have bought bundled RE loans
- Major States, including California, being upside down on their budgets
- Unemployed rates rising rapidly and daily announcements of major industry layoffs
- The stock market being down over 50%
- US economic activity slowing at an increasing rate
- Japan, China, UK: all Major Markets and Trading Partners mired in recession
- General Motors, Ford and Chrysler publicly stating that they are broke and near bankruptcy
- Credit Markets gridlocked: new credit unavailable; old credit being closely reexamined.
Wow!! While talk show hosts and politicians are inclined to take party lines in finger pointing, that effort is a waste of time as there is a great deal of blame to go around. The major culprit, however, was the political pressures brought to change banking rules and regulations to enable increased levels of banking leverage to finance more and more home purchases made by less and less qualified individuals, including illegal immigrants! Over the years that has created demand-inflated real estate prices which, when combined with the added poisons of ‘stated income’ loans and adjustable rate mortgages, ultimately caused the system to collapse.
The predictable result was that defaults and foreclosures started to rise. Investors throughout the world (including mortgage companies, banks, and investment banking firms) that held these securitized mortgages were shocked to discover their portfolios contained the economic equivalent of garbage. This accounting reality spelled insolvency and a complete lack of willingness for others to buy any more of the securitized real estate mortgage packages. The net result was twofold: instant bankruptcies for those caught holding inventories and gridlock in the credit markets.
With that background perspective, back to the core issue of the 2/17/09 Stimulus Package. My initial reaction is that rebuilding US infrastructure (roads, bridges) is a great idea. However, those billions of dollars have a very long planning, engineering and environmental lead times so the actual construction dollars flowing into the economy are most probably at least two years downstream. I have not read the entire bill and thus cannot comment in detail; however, I sense that a lot of political patronage and pork in it favors certain geographic areas and/or selected industries.
Specifically, with respect to small businesses, the bill contains the following:
- Increase in SBA Guarantee %: The legislation increases the percentage that the government will insure of SBA guaranteed loans made by banks from 75% up to 90%. This is a very positive measure in opening up lender’s mindsets with respect to making all types of SBA guaranteed loans.
- SBA Small Business Stabilization Financing provides up to $35,000 to businesses to catch up on existing loan commitments on which they are behind. While it is somewhat of a drop in the bucket, it could be a potentially valuable lifeline for those with loan problems, if they can get the bureaucratic processes moving fast enough to stave off foreclosures, repossessions, etc.
- Secondary Market SBA Guarantee: Many banks have curtailed much of their lending, including SBA loans, due to the absence of secondary markets in which to sell packages of loans. This means active SBA lenders have to make and keep the loans rather than being able to resell them, as they have traditionally been able to do. Congress has set aside $3 billion to guarantee these loan packages as a means of rejuvenating these secondary markets for SBA loan packages. This should be a good measure to start rebuilding the SBA secondary markets.
- Loss Accounting: Starting with the 2008 tax year, companies with gross receipts of under $15 million can use operating losses against earnings for the prior five years (used to be two years) as a means of cutting current taxes and potentially recouping some prior tax dollars. This could be helpful for companies who have been printing some red ink.
- Section 179 Increases: Purchases of equipment, vehicles, etc. can generate deductions against ordinary income. The limit used to be $125,000, and it is now $250,000 for qualifying businesses. This should be an excellent stimulus for encouraging capital spending by profitable companies.
- Hiring Incentives: The legislation adds two new classifications of workers who would qualify for the employer to gain 40% of the first $6,000 of wages paid to new hires as a tax credit, a help to jumpstart hiring.
- Capital Gains Exclusion Increased: Individuals buying stock in a small business, after the date of enactment of the legislation, and holding it for more than five years, can qualify to have 75% of any gain excluded from taxation. While this can add liquidity to the market, the process requires lots of jumping through hoops.
