The writer, a former Wall Street banker, is the author of “Money and Power: How Goldman Sachs Came to Rule the World”
When Jay Powell urged Congress this week to provide struggling US small businesses with “direct tax support,” the Federal Reserve Chairman’s words were music to Mei Zhang’s ears. Like tens of millions of other small business owners in the United States, she is a victim of Covid-19: not from the virus itself, but rather from its economic fallout.
With an MBA from Harvard and a stint at McKinsey under her belt, Ms. Zhang’s response to the coronavirus has been a textbook. She cut costs wherever she could at her San Francisco-based travel agency WildChina, which offers tailor-made tours. She got out of an office lease, paying a fine for doing so. She took money from the government’s $ 669 billion paycheck protection program, which allowed her to continue paying employees at half salary; they now all work from home. But she does not dare to apply for a bank line of credit for fear of not being able to pay the interest and even less the principal. His only hope for survival these days? “Get rid of Covid,” she said wistfully.
Ms. Zhang is not alone. Small and medium-sized business owners in the United States are suffering. According to a recent Goldman Sachs investigation, 88% have exhausted their PPP loans; a third were forced, like Ms. Zhang, to reduce wages or dismiss employees; and 30 percent say that without another PPP-like injection from Congress, they will be cash-strapped by the end of the year. The statistics are even worse for black-owned businesses: 43% say they will be strapped for cash by the end of the year. Facebook reports 31 percent of US small businesses are “non-operational.”
This is a big deal. According to official statistics, in 2019, there were 31 million businesses in the United States with fewer than 500 employees. They represent 99.9% of all businesses and the majority of private sector jobs, creating more than 1.5 million new jobs per year. Helping small and medium-sized businesses get back on their feet is essential for any full-fledged economic recovery.
Unfortunately, not much is done. The Fed flooded the capital markets with lines of credit and promises to buy several debt instruments. It almost doubled the assets on its balance sheet to $ 7 billion. These actions have helped resuscitate capital markets – a lifeline for large companies that can exploit them. Already this year, US corporate debt issuance reached nearly $ 2 billion, beating annual records. Equity markets also rebounded. But all of this has done little to help small businesses.
This is partly why Mr Powell sought to defend the Fed on Tuesday, pointing out in his prepared testimony that his crisis lending facilities were just a “backstop” that reflected his “lending powers” rather than ” spending powers “of Congress. Absolutely: small American companies like Ms. Zhang’s do not have access to capital markets. Most of the big banks are also turning their backs on them, either because they are considered too small or because they are not creditworthy. A few hedge funds have targeted this lending market, but then they extract their flesh pounds through high interest rates and the dreaded “buyout” if things go wrong. This is why the federal P3 program was so important to small businesses. His loans allowed most employees to stay, at least for a period of time, and then were forgivable in many circumstances.
Ms. Zhang, for her part, was impressed with how quickly the funds reached her. “I was amazed,” she said, adding, “but it’s such a tiny amount.” As about 90 percent of Americans, she hopes for a new stimulus package, although that seems unlikely. On September 10, the Democrats blocked Senate Republicans’ supposedly “skinny” coronavirus bill, which included $ 500 billion in additional relief. Democrats were offended by the small amount offered and wanted more. Now there will probably be nothing.
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This means more difficulties for small business owners like Ms. Zhang. She tried to offer virtual learning workshops for people still keen to learn more about China. It is also refocusing on travel within China. But what she really needs is for the confidence of international travelers to return.
This is a big demand given that Beijing is penalizing Chinese airlines for bringing someone to China with Covid-19. “There is no flow of people,” she says. But what she finds really “shocking” is the inadequacy of the US response to the virus, with more than 200,000 deaths to date. Additionally, the US response is unlikely to improve without greater social discipline and testing, faster dissemination of test results, and possibly a proven vaccine. In the meantime, there must be financial support for those who are struggling. “If there is no activity, how long can I keep my staff? ” she sighs.