Federal Reserve Chairman Ben Bernanke cast some gloom upon recent claims of an economic upswing, arguing that small businesses in the United States were still very much facing the credit crunch.

Speaking at a Fed meeting series “Addressing the financing needs of small businesses,” here Mr. Bernanke discussed prospects for restoring the flow of credit to small businesses, saying, “the net percentage of survey respondents telling the National Federation of Independent Business that credit conditions have tightened over the prior three months has remained extremely elevated by historical standards.”

Job scene improves

The Obama administration came out strongly emphasising the improvement in job creation in the private sector for June as a sign of improving conditions in the U.S. economy. Last month, private-sector payroll employment edged up by 83,000 for the month and the overall unemployment rate edged down to 9.5 per cent. However overall employment declined by 125,000 for the month, reflecting a decrease of 225,000 jobs among the temporary employees working on the payroll of the U.S. Census 2010, according to the Bureau of Labour Statistics.

In his speech, Mr. Bernanke said that one measure of banks' loans to small businesses had dropped from more than $710 billion in the second quarter of 2008 to less than $670 billion in the first quarter of 2010. He added, “An important but difficult-to-answer question is, How much of this reduction has been driven by weaker demand for loans from small businesses, how much by a deterioration in the financial condition of small businesses during the economic downturn, and how much by restricted credit availability?”

Mr. Bernanke suggested that all three factors had played a role and therefore to support the recovery, the U.S. had to find ways to ensure that creditworthy borrowers had access to much-needed loans.

Concerted effort

In that context the Fed Chairman said that over the past two years, the Fed and other agencies had made “a concerted effort to stabilise our financial system and our economy…. [which] included working to facilitate the flow of credit to viable small businesses.”

In particular the Federal Reserve had attempted to bring capital from the securities markets to small businesses through the Term Asset-Backed Securities Loan Facility (the TALF programme).

Mr. Bernanke noted that more than 850,000 small business loans were financed in part by securities whose issuance was supported by TALF. Further, he said, stress tests that we conducted last year helped restore confidence in the banking system, allowing banks to raise the capital they need to help offset credit losses and, ultimately, to provide the basis for new lending.

Despite these improvements in lending conditions, Mr. Bernanke struck a cautious note, saying, “Though we believe that our and others' efforts are making a difference, we also know more must be done, and that additional effective action requires hearing firsthand from knowledgeable people who can speak from diverse perspectives about the challenges facing small businesses.”

Arguing that facilitating small business financing was not a simple or straightforward matter, Mr. Bernanke said that the term “small business” encompasses a heterogeneous mix of enterprises, ranging from pizzerias to start-up technology firms, and hence “we should be wary of one-size-fits-all solutions.”

Overall, he said, making credit accessible to sound small businesses was “crucial to our economic recovery and so should be front and centre among our current policy challenges.”