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THE ECONOMIC FALLOUT
technology, and elsewhere. News headlines chronicled the problems: scarce capital
forced midsize firms to pare back investments and shutter offices, while industrial
companies including Caterpillar, Corning, and John Deere; pharmaceutical compa-
nies such as Merck and Wyeth; and tech companies alike laid off employees as the re-
cession took hold. Some businesses struggled to cover payrolls and the financing of
inventory.
The introduction in October of the Commercial Paper Funding Facility, un-
der which the Federal Reserve loaned money to nonfinancial entities, enabled the
commercial paper market to resume functioning at more normal rates and terms.
But even with the central bank’s help, nearly of banks tightened credit standards
and lending in the fourth quarter of . And small businesses particularly felt the
squeeze. Because they employ nearly of the country’s private-sector workforce,
“loans to small businesses are especially vital to our economy,” Federal Reserve Board
Governor Elizabeth Duke told Congress early in . Unlike the larger firms,
which had come to rely on capital markets for borrowing, these companies had gen-
erally obtained their credit from traditional banks, other financial institutions, nonfi-
nancial companies, or personal borrowing by owners. The financial crisis disrupted
all these sources, making credit more scarce and more expensive.
In a survey of small businesses by the National Federation of Independent Business
in , of respondents called credit “harder to get.” That figure compares with
in and a previous peak, at around , during the credit crunch of .
Fed Chairman Ben Bernanke said in a July speech that getting a small busi-
ness loan was still “very difficult.” He also noted that banks’ loans to small businesses
had dropped from more than billion in the second quarter of to less than
billion in the first quarter of .
Another factor—hesitancy to take on more debt in an anemic economy—is cer-
tainly behind some of the statistics tracking lending to small businesses. Speaking on
behalf of the Independent Community Bankers of America, C. R. Cloutier, president
and CEO of Midsouth Bank in Lafayette, Louisiana, told the FCIC, “Community
banks are willing to lend. That’s how banks generate a return and survive. However,
quality loan demand is down. . . . I can tell you from my own bank’s experience, cus-
tomers are scared about the economic climate and are not borrowing. . . . Credit is
available, but businesses are not demanding it.”
Still, creditworthy borrowers seeking loans face tighter credit from banks than
they did before the crisis, surveys and anecdotal evidence suggest. Historically, banks
charged a percentage point premium over their funding costs on business loans,
but that premium had hit points by year-end and had continued to rise in
, raising the costs of borrowing.
Small businesses’ access to credit also declined when the housing market col-
lapsed. During the boom, many business owners had tapped the rising equity in their
homes, taking out low-interest home equity loans. Seventeen percent of small em-
ployers with a mortgage refinanced it specifically to capitalize their businesses. As
housing prices declined, their ability to use this option was reduced or blocked alto-
gether by the lenders. Jerry Jost told the FCIC he borrowed against his home to help
