Dear PBO #3 – Small Business Hiring and Interest Rates

Below is my letter to the President regarding the economy; it is in summary form.  To see full details click the Dear PBO page and go to the June 30 letter (dear pbo-3) along with the analytical attachment.

Dear Mr. President

As promised last week, I would give you some thoughts on tax credits and interest rates regarding small and mid sized businesses.  For small business, getting them to use tax credits will need a monumental approach.  Remember, all in the name of fiscal policy – the way to change behaviors.

Let’s first examine tax credits.  This needs to be really big.  Why?  Many businesses and for that matter unemployed workers have gotten “used” to the recession and its “recessionary daily life”.  This is the most dangerous position of all since it leads to no consumer spending – the real fuel of any economic recovery.

Provide a sliding scale tax credit for hiring new workers – a 25% tax credit of the salary of any new hire to any company for up to three years. 

Now for the really BIG idea – if any employer hires someone currently unemployed for over 6 months, then a 100% tax credit of the salary in the first year is created, 75% tax credit in the second year, 50% tax credit in the third year.  All of these tax credits can then be sold.  This relieves the small business of cash requirement for new employment and the fear of hiring.  If the person hired has a house that is in or near foreclosure, the bank (if it had received TARP money) is required to cease foreclosure proceedings (or delay filing) and rewrite the note to accommodate the new family income. 

This does a number of good things: (1) it decreases the number of foreclosures, (2) it allows banks to put good assets back on their balance sheets improving their capital structure, (3). it greatly helps the real estate market by reducing distressed properties (4) it relieves family financial stress that likely has led to family breakups, divorce, etc. (a cost we will bear in future years).

Lastly, raise interest rates.  Yes raise rates so that bankers can see a higher profit on higher risk loans.  Our good friend, Mr. Bernanke, elected to reduce the prime rate in late 2007 in an effort to help the economy, to boost lending.  By that time the banks had already shut off the credit flow and no interest rate adjustment would make any difference.  Reducing interest rates did nothing but harm the majority.

 The decline in the interest rates reduced profits at a time when future business risk was appearing to be on the increase.  Almost every bank funds its small and much of its mid sized business lending with interest free business deposits.  With costs remaining the same or rising, the loans at the lower prime rate were not attractive since the spreads were declining and the risk was rising.  These loans still aren’t attractive.  I am only interested in business solutions.

Thanks for the listen, until next time.

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