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My Crystal Ball and How to Recover the Economy Quicker
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There are several things the folks in Washington can do right now to get our economy back on track . . . and the beauty of my suggestions is that we don’t need to create new governmental programs – – just tweak ones that are currently on the books. Full disclosure: I wasn’t asked to join the Transition Team or get “background-checked” for any appointments, but I think I know a thing or two about small business, entrepreneurial finance and public policy.

Go Small to Get Bigger

The first thing I’d suggest is to place the government’s emphasis on helping small businesses and the entrepreneurial parts of our economy . . . NOT the big, dying, and often DUMB corporations. If this were about 100 years ago, these same people inside the Beltway would be trying to prop-up the horse-and-buggy whip manufacturers. Does that make sense to you? I didn’t think so. Our politicians show an obvious ignorance about a fundamental aspect of capitalism, known to every businessperson intellectually or instinctively: something new always comes along to render useless the things that are currently in use and all the rage. It’s called “creative destructionism,” and it’s the business-world-equivalent of Darwinism: it’s not necessarily the strong that survive, but the adaptive that do. Now would be a good time for our politicians to acquaint themselves with this real-world principal. For instance, rather than propping-up Detroit, maybe we should be encouraging tomorrow’s new car manufacturers – – the ones that are currently building energy-efficient vehicles that will lessen our dependence on foreign oil. Don’t you suppose a lot of those factory workers employed by the Big Three would want to help jump-start dozens of new electric car manufacturers?

The Small Business Administration (SBA), created over 50 years ago, is the only agency in our government that exclusively serves the needs of small business owners and entrepreneurs. That’s where we need to focus our efforts from here on out. The new SBA Administrator needs to issue a memorandum removing the duplicity between their two flagship loan programs – – the 7(a) and the 504 – – thus mandating that all commercial real estate projects be financed only with 504 dollars, thereby freeing-up more 7(a) dollars for working capital, start-up capital, and business acquisitions.

The allowance of 504 loans to refinance commercial property would naturally follow from that. This would unleash an avalanche of refinances by business owners looking to pull-out some of their equity in commercial property, tax-free. Why shouldn’t America’s business owners and entrepreneurs have access to the least expensive capital available in the marketplace (504 second mortgages) to refinance their commercial property? This is what we should support as public policy, but sadly, it isn’t presently allowed.

Next, I’d suggest that the new SBA Administrator propose an 80% government guarantee on the 1st mortgages of 504 loans and 95% guarantees on 7(a)’s. This would bring back some of the 300+ lenders who have left the SBA arena over the past two years, including a few of the 16 lenders on the Top Twenty SBA lenders list who have shut down their programs or radically retrenched in the past twelve months. Does anyone really need more evidence than this as to why SBA lending has decreased so much over the past couple of years? Reducing lender and borrower fees is nice, as some politicians have proposed, but it will do little to increase demand. This is an access to capital issue, NOT a cost of capital issue.

I’d also proposed an increase in the SBA’s marketing budget of 50% over the next two years so they can better get the word out on their terrific programs for America’s businesses – – of course, this may take private-sector firms to truly do yeoman’s work for them. Those who think the SBA is a “lender of last resort” are still living in a bygone era and would clearly be shocked at how efficient and effective today’s SBA really is. If someone has recently had problems with an SBA loan, it’s much more likely that their lender is causing delays rather than the SBA.

Briefly, as I have limited space here to talk about this, here are a few more things that would help solve our economic problems quicker:

  • Get competitive bidding and purchasing by the U.S. government of secondary market SBA debt with the TALF funds.
  • Enact an immediate moratorium on the cult of “mark-to-market” accounting, which is single-handedly one of the biggest culprits to the trillions of dollars of net worth lost in the past year.
  • Abolish all capital gains taxes on small enterprises (defined as start-ups or enterprises with revenue less than $75 million in 2008 revenue) begun and/or capitalized in 2009.
  • Enact across the board reductions of all income tax rates by 5% (with this reduction taking effect immediately in payroll withholdings).

Yes, we could argue the merits of such measures as a flat tax, but I’d rather make suggestions that have a fighting chance within this new Congress, not suggest things that will take years to enact (plus, when our new Treasury Secretary can’t seem to pay his own taxes, yet he now leads the IRS – – is he a tax cheat or just a protester like most of us would like to be?!? – – but I digress . . .)

Painful Paradoxes

I’m often asked by news media to comment on various issues regarding the SBA, small business, entrepreneurship, franchising, etc., and the above recommendations are ones I’ve been advocating for immediate action. They are relatively painless, and they help Main Street. Wall Street and Big Companies have been helped enough, even though they employ only a small percentage of the U.S. labor force. It’s paradoxical that larger companies, with their resources and focus, can hire legions of lobbyists to represent them, though they represent minute job creation figures; while small businesses, with their limited resources and fragmentation, have few voices to carry their banner, though they create the vast majority of the jobs in our country. This is something that must change.

The emerging New Economy is one that brings us closer to our origins as a Nation (and if you’ve faithfully read this blog or our newsletter, then you know this is something I’ve written about for a couple years). We were once a Nation of mostly shopkeepers and independent farmers . . . all of whom we’d now refer to as “business owners and entrepreneurs.” The mantra we’ve all heard from our parents to “get an education and go work for a big company where you’ll have a pension” is dead. It’s been dying. This isn’t the 1950’s anymore. I submit to you that it is more risky NOW to go work for a Big Dumb Company than it is to start-up or work for something much, much smaller. YOU control your destiny, whether you actively attempt to control it or your non-action thrusts destiny’s wishes upon you. It’s time for self-reliance to take center stage.

The politicians in Washington are always the last to grasp an emerging trend. After years of growing government, they’ll eventually see that they need a thriving business sector to provide those jobs that they want created – – they can’t ALL be government sector ones. We’ll have another Reagan Revolution . . . and we won’t have to wait quite as long this time, as the pace of life has sped up so much. Prepare yourself. Washington will grow and enter your life more now than ever, but the backlash is coming. It will be swifter and more furious than anyone expects. Own property, as it is a fundamental right and a stabilizing force in a democracy . . . and it is one of the best ways to grow your net worth. Work for yourself or for a progressive, nimble firm and transform an industry. Dream big. Dream often. Dream today and TAKE ACTION NOW.

3 Comments

  1. Dixie Morse says:

    Well said, I enjoy your blogs, thank you for taking your time to do this.
    And the question is, how do we get you to sit in front of congress and voice our opinions!!

  2. CHARLES DENCH says:

    I think helping small business through the sba is a good idea, but besides that there are only (2) items needed in a stimulus package.

    1) 10% tax credit for hiring new full time employees by Sep 30, 2009. The 10% credit would be on the first (2) years of payroll for new employees with maybe a limit of $ 50,000 of pay per year per employee.

    2) 10% investment tax credit for purchases of new equipment for businesses and the purchase needs to be made by August 31, 2009. Credit would decrease each month for purchases after after Aug.

    It only costs the taxpayer 10% of the benefit paid by the business. Where when the government hires an employee it costs the taxpayer about 120% of the actual payroll to the employee.

    Sincerely,

    Chuck Dench

  3. Joseph Rott says:

    You have some good comments, but keep in mind that the problems with the economy started with housing and to fix the economy we need to fix housing. Here’s what we need to do:

    1) Since the government is bailing out the banks they need to re-adjust the interest rates on ALL home loans to 4.5% – the banks will not like this, but the survival of the American economy is more important than what they want.

    2) The federal government needs to require that ALL banks hire enough staff to handle the workload of borrowers who are requesting loan modifications – since short sales cost banks an average of 19% of the value of the home and foreclosures cost 40% of the value of the home, one would think bank leaders (supposedly good business people) would act by applying cost/benefit analysis – however this does not appear to be the case – so the banks need to be required to adjust loans up to an 18% reduction in monthly payments – it’s simply good business sense to do so! The fines for banks which do not voluntarily comply with this need to be so expensive that they will have no other choice.

    All of the bank executives and government leaders who were at the helm when all the banking problems occured need to be fired – how cna the idiots who let this get so bad be expected to know what the solutions are?

    The old rule of 10 loans per real estate investor need to be re-instated. The current across the board policy of limiting investors to 4 loans is a huge mistake as it further limits demand in an already extremely weak housing market. It is foolish to punish all investors for the problems associated with those who had poor credit and should not have received loans in the first place. As the saying goes. “don’t throw the baby out with the bath water.”

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