Wall Street Credit Crisis Rings Hollow on Main Street

The credit crisis is dominating headlines and hammering financial stocks, causing once seemingly invincible Wall Street investment houses to quake and major money center banks to quiver. But is the problem really filtering down to Main Street and the countless small businesses that provide the jobs that fuel the economy?

The nation's top economic leaders repeatedly raised the specter of a Main Street meltdown on Capitol Hill this week to justify a $700 billion bailout for major financial institutions. But the message is pretty much ringing hollow on Main Street, where rising prices and the economic slowdown outweigh credit concerns, according to the National Federation of Independent Business (NFIB).

The NFIB's chief economist, William C. Dunkelberg, said in an exclusive interview this week that the organization's monthly survey of economic conditions has yet to detect anything that would indicate severe credit stress among its members. Only 2 percent of those polled said credit was their No. 1 problem in its August survey. Credit was mentioned as a problem by 10 percent of those surveyed, which is up from about 3 percent in 2002. But the change is normal. "Is credit tighter? Yes," Dunkelberg says. "But it's always tighter at the end of the quarter."

In comparison, during the 1981-82 recession, 23 percent of small business owners said credit was their No. 1 problem. Even during the stock market crash of 1987, which saw the Dow Jones Industrial Average plunge 22 percent in one day, credit was never a major issue for small companies, he said. "We looked at our data, and the economy kept going until 1991. It is true that AIG stock is down and bank stocks in people's portfolios may be down, but looking at the fundamentals of the economy, it's not even as bad as 2001," he says.

"Bank of America may not be making car loans because it's short on capital, but I can't imagine why it would be difficult to get a car loan, unless the borrower is not a good credit risk," says the NFIB economist. "If you are looking to borrow 100 percent of the retail value of the car, no, but car loans are available."

According to the NFIB's survey, the No. 1 issue among small business owners is inflation. Of those surveyed, 18 percent said rising prices, from surcharges and higher fuel prices to rising utility bills and higher materials costs, is their biggest worry. "It's coming in the back door," says Dunkelberg.

But not all small business groups share that view. The National Small Business Association (NSBA) says 55 percent of the small business owners it polled in February had been affected by the credit crisis. That number increased to 67 percent in August. The three biggest concerns, however, were general economic uncertainty, rising energy costs, and the rising cost of health care.

Small-firm demand for loans has also significantly decreased in the past three months. About 15 percent of large domestic banks, on net, experienced weaker demand from small firms; however, 5 percent of these banks, on balance, reported increased demand from large and middle-market firms, the NSBA noted, citing Federal Reserve data.

But Dunkelberg says that may be more a reflection of the slowing economy rather than a credit crunch. "The economy is soft. People who would be good borrowers are not borrowing to finance inventories or for other reasons," he says. "People will blame it on the credit crunch but the demand side is just down. I am sure there are some applicants who won't look good from a P&L basis, but that's not a credit crunch, it's just normal underwriting."

If Wall Street credit problems are affecting small businesses at all, it is reflected in their credit card terms. In a nationwide NSBA survey, 44 percent of small business owners said credit cards were their principal source of financing in the previous 12 months, more than any other source of financing, including business earnings. Nearly two-thirds reported in August that their credit card terms are getting more unfavorable.

In fact, some credit card companies are giving their customers cash bonuses if they cut back their credit card lines and, in some cases, credit card companies are unilaterally cutting back credit limits. The move, says Dunkelberg, is designed to free up capital held in reserve against those potential liabilities, which suggests the companies are trying to shore up their capital base for other reasons.

In the end, however, the real problem is a lack of confidence in the financial system, and that's rooted more in psychology than economics. Major banks are refusing to lend to each other because it's too difficult to determine the level of risk, or even if the bank will be around tomorrow. In that sense, the government shot itself in the foot when it took over Fannie Mae and Freddie Mac, the two government-chartered private mortgage companies. The move wiped out shareholder equity, and sent a chilling message to investors. Who's next?

Even the big banks and other institutions are buying treasuries to preserve capital rather than lending or investing. "Treasury yields are way down because nobody can figure out exactly what's going to happen," says Dunkelberg.

If the administration's bailout plan passes, which seems likely as early as this weekend, the big financial institutions will benefit from unloading their toxic investments on the U.S. Treasury. Hopefully, it will stabilize credit markets and help restore investor confidence. But after that, where do you draw the line?

General Motors and Ford Motor Co. are also angling for government loans to finance the next generation of hybrid cars. The airlines, which have been hammered by rising fuel costs, are also lining up. A lot of community banks have sour construction loans on their books; what about them? And what about sour student loans and defaulted credit card accounts?

One thing is certain, once Congress creates this pool of capital to mop up Wall Street's mess, the line for government bailouts is going to grow quickly.