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 small US companies with “direct fiscal 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 US, she is a victim of Covid-19: not of the actual virus, but rather its economic fallout.
With a Harvard MBA and a stint at McKinsey under her belt, Ms Zhang’s response to the coronavirus has been text book. She has cut costs wherever she can at her San Francisco-based travel company, WildChina, which provides bespoke tours. She got out of an office lease, paying a penalty to do so. She took money from the government’s $669bn Paycheck Protection Program, which allowed her to keep paying employees at half pay; they all now work from home. But she doesn’t dare seek a bank credit line for fear that she couldn’t pay the interest let alone the principal. Her only hope these days for survival? “Get rid of Covid,” she says wistfully.
Ms Zhang is not alone. Small and medium-sized business owners across the US are hurting. According to a recent Goldman Sachs survey, 88 per cent have exhausted their PPP loans; a third have been forced, like Ms Zhang, to cut wages or to lay off employees; and 30 per cent say that without another PPP-like infusion from Congress, they will run out of cash by the end of the year. The statistics are even worse for black-owned businesses: 43 per cent say they will run out of cash by the year end. Facebook reports 31 per cent of small US businesses are “non-operational”.
This is a big deal. According to official statistics, in 2019 there were 31m businesses in the US with fewer than 500 employees. They represent 99.9 per cent of all companies and the majority of private sector employment, creating more than 1.5m new jobs a year. Helping small and medium-sized businesses get back on their feet is essential for any full-fledged economic recovery.
Sadly, not much is being done. The Fed has flooded capital markets with lines of credit and pledges to purchase multiple debt instruments. It has nearly doubled the assets on its balance sheet, to $7tn. These actions have helped resuscitate capital markets — a lifesaver for big businesses that can tap them. Already this year, US corporate debt issuance has reached close to $2tn, beating annual records. Stock markets have rebounded too. But all this has done little to help small businesses.
That is partly why Mr Powell sought to defend the Fed on Tuesday, stressing in his prepared testimony that its crisis lending facilities were only a “backstop” that reflected its “lending powers” rather than Congress’ “spending powers”. Quite so: small US companies such as Ms Zhang’s can’t access capital markets. Most big banks turn their backs on them too, either because they are deemed too small or not creditworthy. A few hedge funds have targeted this lending market, but they then extract their pounds of flesh through high interest rates and the dreaded “loan to own” if things go terribly wrong. That’s why the federal PPP program was so important to small businesses. Its loans allowed most employees to be retained, at least for a while, and then were forgivable under many circumstances.
Ms Zhang, for one, was impressed at how quickly the funds reached her. “I was amazed,” she said, adding, “but it’s such a tiny amount.” Like some 90 per cent of Americans, she hopes for a new stimulus package, although that looks unlikely. On September 10, Democrats blocked the Senate Republicans’ so-called “skinny” coronavirus bill which included $500bn in additional relief. Democrats were offended by the small amount proposed and wanted more. Now, there’s likely to be nothing.
That means more hardship for small business owners, such as Ms Zhang. She’s tried offering virtual learning workshops for people still eager to know more about China. She is also refocusing on travel inside China. But what she really needs is for international travel confidence to return.
That’s a big ask given that Beijing penalises Chinese airlines for bringing anyone into China with Covid-19. “There’s no people flow,” she says. But what she really finds “shocking” is the inadequacy of the US response to the virus, with more than 200,000 deaths so far. Moreover, the US response is unlikely to improve without greater social discipline and testing, faster dissemination of test results and eventually a proven vaccine. Meanwhile, there has to be financial support for those struggling. “If there’s no business, how long can I keep my staff on?” she sighs.