Meredith Whitney Says Small Business Credit Crunch Will Hurt The Overall Economy

October 2, 2009 12:20 PM EDT

Today, Meredith Whitney penned an op-ed column in the Wall Street Journal that warned investors that the credit crunch affecting small businesses will reverberate throughout the economy.

Since the credit crisis began over two years ago, available credit to small businesses and consumers has contracted by trillions of dollars, and that is reflected in dismal consumer spending trends. Whitney said small business loans are hard to find, and credit-card lines (a critical funding source to small businesses) have been cut by 25% since last year.

She said small businesses matter to the U.S. economy because these businesses employ 50% of the country's workforce and contribute 38% of GDP. She argued that without access to credit, small businesses won't be able to grow and all too often go out of business.

Whitney is angry that taxpayer dollars have supported "too big to fail" businesses yet left small businesses unassisted and at a significant disadvantage. She's also concerned that with credit card companies tightening their belts, small businesses will have a tougher time utilizing credit cards as a funding source.

Small businesses primarily fund themselves through credit cards and loans from local lenders. In the past two years, credit-card lines have been cut by over $1.25 trillion. According to the most recent Federal Reserve data, small business lending is down 3%, or $113 billion, from fourth-quarter 2008 peak levels—the first contraction since 1993.

Whitney said there should be incentives provided to smaller banks to step up small-business loans on a greater scale.

Whitney said that we are only in the early stages of the second half of this credit cycle. She expects another $1.5 trillion of credit-card lines to be removed from the system by the end of 2010.

Whitney does not like the new credit card regulations that were passed in May 2008 that could hurt the availability of credit. She said regulators should be mindful that regulatory changes during the midst of a credit crisis often ends with unintended consequences. Those same consumers that regulators were hoping to protect will actually be hurt by a vast reduction in available credit.

Meredith concluded her piece with this, "Main Street represents the foundation of this country. Reviving it should take priority over any regulatory reform or systemic overhaul."

Stocks Mentioned

Related Entities

• Meredith Whitney

Add Your Comment

Name

Subject

Body

Verification can't see the text?
click here to refresh the image.
what's this?