Small Business Survival In the Aftermath of Dodd-Frank–Part 2 (General Background)

Small businesses, which provide roughly two-thirds of the employment and much of the economic muscle, are still the key to economic performance.  Our eight year recovery has been abysmally slow—most of the time our nation’s economic growth has inched along at around 1% per year. What we have been told is that the recovery has been slow because the recession was so much deeper than anyone realized. From my direct business experience, that particular explanation is not the reason for our long-term economic stagflation. Regardless of how deep the recession was, our legislators caused much of the ensuing economic problems and they caused it through the Dodd-Frank Wall Street Reform and Consumer Protection Act.

The phrase  ”The road to hell is paved with good intentions.” certainly seems apt.

Our politicians have done an excellent job of paving the road to economic hell, and the main tool was over 22,000 pages of new regulations. The economic tsunami that put our country in serious financial jeopardy was precipitated by the housing collapse, courtesy of Fannie Mae and Freddie Mac, and “too big to fail” banks trading in highly leveraged derivatives.  So our politicians set out to protect us by preventing anything like this from happening again.  They passed the Dodd-Frank Wall Street Reform and Consumer Protection Act to solve the problem.  Just in case you have missed these minor details, Fannie Mae and Freddie Mac are NOT covered by that act and the big financial institutions have NOT been prohibited from derivative trading. Critical problems have not been solved. Wall Street has not been seriously reformed. The “too big to fail” banks are bigger still.  Banks, not the massive banks that were causing problems but the smaller banks that were not, are still unable to make the loans to small businesses that would fuel a robust recovery. Many of those smaller banks, in themselves small businesses, have simply gone out of business.  An excellent overview of the impact of Dodd-Frank on the banks that we small investors rely on for business loans is in this New York times article:
The law’s “Wall Street” focus snares community banks in a complex web of rules designed for larger banks, forcing them to divert resources to …

Under the new regulations, existing small businesses have failed at a rate faster then new businesses have been formed.  We know that regulations are necessary and it may be difficult to see how they could possibly be harmful.  With over 22,000 pages of new regulations, the Dodd-Frank Act must have been able to do something right somewhere. It did a lot wrong. In spite of assertions to the contrary, it favored the big banks and hamstrung the small ones.  With one simple regulation, the regulation mandating that business loans held by most small businesses are in default (non-conforming) if the income to expense ratio of that business is not at least 1.25, the new regulations put my world in crisis.  Credit is the lifeblood of most small businesses, and these regulations cut off that lifeblood. When my experiences are multiplied by hundreds of thousands of other small businesses throughout the country, I believe they take the mystery out of why our employment recovery has been lethargic and our economic growth pathetic.

*** Gary A. Howie MSc, PhD *** is  business owner/rancher and a Life & Liberty News contributorgary howie


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