As a followup to my post of yesterday, consider this post from Steve Hanke at Cato@Liberty. Hanke argues that Fed policy is creating a credit crunch for small business:
Without the security provided by a reliable interbank lending market, banks have been unwilling to scale up or even retain their forward loan commitments. This was verified in a recent article in Central Banking Journal by Stanford Economist Prof. Ronald McKinnon - appropriately titled "Fed ‘stimulus' chokes indirect finance to SMEs." The result, as Prof. McKinnon puts it, has been "constipation in domestic financial intermediation" - in other words, a credit crunch.
When banks put the brakes on lending, it is small and medium enterprises that are the hardest hit. Whereas large corporate firms can raise funds directly from the market, SMEs are often primarily reliant on bank lending for working capital. The current drought in the interbank market, and associated credit crunch, has thus left many SMEs without a consistent source of funding.
So not only are Americans increasingly risk averse when it comes to starting new businesses, the financing for small business is also constrained. Almost all the policies - fiscal, regulatory and monetary - enacted since the crisis have been to the benefit of large business. It is a strategy designed to maintain the status quo, ignores the future and concentrates power. While we may see spurts of better than the recent trend of growth, the long term outlook will remain dim until we do something to encourage a return to the traditional engines of American growth.
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