A conference on the Euro at the Peterson Institute for International Economics focused mostly on the economic crisis in the U.S. and the world. Lorenzo Bini Smaghi, a member of the Executive Board of the European Central Bank, emphasized that a solution for the entire world market, not just the EU or the US, was needed. When many markets are interconnected, a weak spot in one economy affects all of the economies, he said. He wanted to reassure banks that they will get all of the money they need so that they can start lending, fearing that the credit crunch will hurt the main economy.

Dominique Strauss-Kahn, the Managing Director of the International Monetary Fund, agreed that action is needed to be taken immediately to try to solve the crisis. He pointed out that confidence in the market is necessary to stop the credit freeze. Any action taken, said Strauss-Kahn, should have a clear objective, have oversight on how public money is used, should be comprehensive and coordinated with all actors at every level. He added that the action must also be acceptable for citizens. “We can solve the problem we’re facing,” said Strauss-Kahn, we just need to act quickly.

“You have a real business oriented government…looking like a socialist country now, where all of the financial sector is going to be owned by the state at the rate that we’re going,” said Trillion Dollar Meltdown author Charles Morris.

Morris credits former Chairman of the Federal Reserve Alan Greenspan for much of the recent financial turmoil. In 2000, amid the dot-com bust, the U.S.’s Gross Domestic Product dropped considerably. In response the federal funds rate, the interest that banks are charged, was lowered to the point that it passed the consumer price index.

While the market rapidly picked up in 2002, the Federal Reserve did not adjust the funds to meet inflation over two years. As a result the banks were charged a disproportionately low amount of interest and took advantage of the misstep, essentially treating their loans from the Federal Reserve as free money.

“We have notion that the credit crunch is just the first step,” said Morris.

David Schroeder, president of the American Enterprise Bank, speaking on behalf of the Independent Community Bankers Association, says that “policymakers must also focus on the needs of the small business sector during this economic slowdown.” He says Small Business Administration (SBA) loan programs should “bolster small business credit in economic slowdowns,” but instead the number of SBA loans being made is plummeting. (0:26)

 

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Chairwoman Melissa L. Bean (D-Ill.) of the House Small Business Subcommittee on Finance and Tax says that as banks and other institutions struggle, they are pulling back on lending, which makes credit harder to access for small business. She quotes a survey that says one-third of small business owners find credit more costly, less available, or both. (0:46)

 

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The House Small Business Subcommittee on Finance and Tax held a hearing on “The Effect of the Credit Crunch on Small Business Access to Capital” to hear testimonials from small business owners, an independent community bank representative, and a credit union representative.
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