elizabeth a duke : small business credit – next steps speech by ms elizabeth a duke, member of the board of governors of the federal reserve, at the federal reserve meeting series : “ addressing the financing needs of small businesses ”, washington dc, 12 july 2010. * * * good afternoon. i want to thank all of you for participating in today ’ s discussion about the financing needs of small businesses. i particularly want to thank karen mills, the small business administration ( sba ) administrator, for her remarks and our distinguished panelists for helping us to better understand the dynamics of small business lending in these difficult economic times. i would also like to thank everyone who participated in the more than 40 regional meetings that led up to today ’ s conference and to thank the reserve banks for their sponsorship and organization of those meetings. they brought together small businesses, lenders, technical assistance providers, bank examiners and others involved in small business credit to help identify barriers to small business credit access and to suggest potential solutions. as many of you know, i came to the federal reserve after many years as a community banker. quite a number of those years were spent lending to the small businesses that were the backbone of my local economy. that experience gives me a deep appreciation for the importance of credit to economic growth and the particular importance of small business lending to job creation in local communities. so, as you might imagine, the recent decline in availability of credit to small businesses concerns me. it also concerns my colleagues across the federal reserve system. when the mortgage crisis first broke a few years ago, we were able to build a body of data and an understanding of relevant issues through a series of meetings convened by the federal reserve banks across the country on topics such as foreclosure or neighborhood stabilization. as we started hearing more about problems encountered by small businesses in accessing credit, we again tapped the broad footprint of the reserve bank system and the web of local contacts they have developed to help us better understand the issues surrounding loans to small business. i attended one of the regional meetings in june and was pleased to see firsthand the quality of the conversation that took place. today we have seen evidence that the conversations were equally rich across the country. the information gathered through this kind of outreach is invaluable as we consider our policy options, and i hope that you have found it similarly helpful. today ’ s agenda was organized around the common issues identified in those regional meetings. we looked at small business credit issues from

to year with capital deepening, etc. updated estimates will be available january 26. comments 1. the cbo estimate of gdp is on a pre - benchmark - revision basis. given that the revisions raised gdp growth during the 1990s, this figure likely will be revised up on january 26. 6 / 99 date of estimate congressional budget office source estimates of nairu and potential gdp growth for 1999 table 1 these charts about whether the perceived imbalance is real and serious, but we can at least understand why concerns have been raised in each case. the chart for the stock market, figure 2. a, shows the price - to - earnings ratio for the s & p500 index, based on the trailing four - quarter earnings. the current p / e ratio of about 32 compares with an average of 16 since 1957 and a high before this expansion of 22. 3 in august 1987. the personal saving rate, charted in figure 2. b, has declined in this episode to a record low. the current account balance, pictured in figure 2. c, is measured as the ratio to nominal gross domestic product ( gdp ). this ratio has also declined to a record low. in figure 2. d, i have charted the ratio of debt service costs to disposable income for the household sector, a preferred measure of the household debt burden. it has been rising since the mid - 1990s but remains below the peak reached in the mid - 1980s. as i noted, none of these diagrams definitively demonstrate that there is an unsustainable imbalance. the point of the exercise is to show why some have worried that there might be. it would take a more detailed analysis than time permits to reach an informed judgment about the risks in each case. and when we were done with this more detailed analysis, we could reasonably expect that we would still be left with considerable uncertainty. common sources of recent developments what i do want to focus on this afternoon are possible common sources for the developments pictured in figure 2 and the relation of any imbalance between aggregate supply and demand to those developments. there are, i believe, some common sources of the developments pictured in figure 2. first, these variables are all cyclically sensitive. during expansions, equity prices tend to rise, although they often decline before a downturn in the economy. discerning a consistent pattern for the saving rate during an expansion from the chart is more difficult : too many other factors play a role. but regression analysis indicates that