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Decline in Small-Business Lending Perplexes Feds

Lending to small businesses fell below $670 billion in the first quarter of 2010 compared to $710 billion in the first quarter of 2008, when a downward slide began.

Federal officials are not sure why lending has not picked up. Noting that some business owners are dipping into retirement accounts and using credit cards to fund their businesses, the chairman of the Federal Reserve on Monday asked banks and regulators to help out.

Small businesses are typically defined as those with fewer than 500 people, and they employ half of the U.S. labor force, according to the Small Business Administration, and are said to be responsible for about 60 percent of job creation in recent years.

“How much of this reduction has been driven by weaker demand for loans from small businesses, how much by a deterioration in the financial condition of small businesses during the economic downturn , and how much by restricted credit availability?” said Fed Chairman Ben Bernanke. “No doubt all three factors have played a role.”

During a daylong forum at the central bank Monday, bankers argued that those who deserved loans are getting them, according to a report by the The New York Times, and economists tended to agree there was no widespread refusal to lend.

Other speakers disagreed.

“With all due respect for my banking colleagues, there is an apparent disconnect between the proclaimed ‘business as usual’ and the widespread problems with access to credit reported by small businesses,” said Shari Berenbach, president of the Calvert Foundation, a nonprofit that lends money to community development financial institutions serving poor and working-class areas.

One problem seems to cut across all the issues, the Times reported: The lousy economy has businesses still cutting back, not investing.

Suveys show that capital spending is at a 35-year low, said William C. Dunkelberg, an economist at Temple University. “Credit’s not an issue,” Dunkelberg said. “Customers are the issue.”