Director’s Corner: Federal Program Highlights Related to Credit and Capital Markets Reestablishment

Recently, I read the Federal Reserves’ monthly report of current economic conditions, called the “Beige Book,” just to see how the recovery was being reported by the Fed’s statistical analysis of its twelve Federal Reserve districts. In its April 14th report, the Fed reported a much welcomed increase in manufacturing activity. It also reported that while credit conditions may have improved ever so slightly, credit demand for upper tier firms remained weak, as those firms routinely chose to utilize cash reserves instead of credit.

The Fed also reported that credit quality for middle market and smaller firms continued to decline. It appears that even as the DOW Jones Industrial Average continues to climb and new optimism grows, credit is still tight!

The low ebb of job creation and employment remains one of the most daunting challenges of the current economic recovery, and everyone recognizes the need to reignite small business growth to foster employment growth.

In my view, this reignition requires among other things, access to leverage capital and the reestablishment of the quality and quantity of business and consumer credit. While much has been written about the federal bank and auto bailouts, the federal government’s fledgling efforts to reestablish both consumer and business credit have attracted little notice.

Congress through the adoption of the Housing and Economic Recovery Act of 2008 (HERA) and the American Recovery and Reinvestment Act of 2009 (ARRA) laid the groundwork for the recovery by authorizing a number of programs designed to address the effects of the “Great Recession” and its accompanying credit crunch.

HERA established the Neighborhood Stabilization Program (NSP1) for the purpose of stabilizing communities like those here in Wayne County suffering from consumer mortgage foreclosure and abandonment which I have discussed here in this column.

These efforts were further bolstered by ARRA’s establishment of NSP2.

Despite NSP’s many successes, results of credit reestablishment by NSP have been mixed, due in part to severe housing price erosion and the contraction of the secondary mortgage market, but efforts continue.

ARRA’s provisions have proven much more successful in regards to small business lending.

Crain’s Detroit Business recently reported that as of April 9^th, the SBA had backed 1,659 loans since the passage of ARRA, supporting $651 million of small business loans. It has also been reported that 54,000 jobs have been created or retained here in the State of Michigan since ARRA’s passage. With small business growth as the cornerstone of job creation this gives me ample reason for continued but measured optimism.

ARRA also added §54AA to the Internal Revenue Code and created the taxable Build America Bond (BAB) program. It further added §§ 1400U-1 through 1400U-3 to the Code, which created and established the Recovery Zone Bond program.

The Recovery Zone Bond and the BAB in particular, have very successfully reinvigorated the multi trillion dollar municipal securities market, which all but disappeared after the events of September 2008 and the onset of the “Great Recession.”

I have recently learned that the BAB program has been so successful, that House Ways and Means Committee Chairman, Sander Levin, is reportedly considering an extension of the BAB program through 2013.

Unfortunately, there has been no word on the fate of the Recovery Zone Bond program, which is currently slated to expire on December 31, 2010.

Additionally, although not created by HERA or ARRA, the New Markets Tax Credit (NMTC) program has also proven so successful that on April 8^th, the US Treasury announced the availability of $5 billion of new tax credit allocation.

The NMTC program was first created by the Community Renewal Tax Relief Act of 2000 (Community Renewal Act), in an effort to address the persistent challenges of the revitalization of impoverished low income communities throughout America.

Since its inception over $19 billion of tax credit allocation has been authorized by the program, and to date, has resulted in several billion dollars of new investment by banks and individuals in low income communities, which have traditionally found new investment extremely difficult, if not impossible.

All told, while some results have been mixed, and more is needed, the federal stimulus is working, albeit slowly and steadily, as the capital and credit markets move toward a much awaited return.

Turkia Awada Mullin is Chief Development Officer for Wayne County EDGE.