Several papers are reporting what we have been hearing for the past week – a possible second economic stimulus package is in the early stages of discussion. As the Wall Street Journal reported:

Senate Majority Leader Harry Reid (D., Nev.) said he had spoken to the Democratic leadership in the House of Representatives about a second economic-stimulus package, in another attempt to bring the country out of what increasingly seems to be a severe economic downturn.

If Congress takes up another stimulus package, it will likely be in September, not July, and it should include provisions to free up small business capital like relief from the built in gains tax.

Why is small business capital important right now? Secretary Paulson and Fed Chairman Bernanke testified yesterday about the on-going challenge faced by the housing market and, more specifically, what might happen if the financial condition of the two massive government sponsored secondary market entities – Fannie Mae and Freddie Mac – continues to deteriorate.

The challenge for lenders is two-fold. First, the GSEs make up a majority of the secondary mortgage market and their withdrawal would create a liquidity challenge for banks and homebuyers. It would be significantly harder to get a home loan. Perhaps more importantly, banks hold significant amounts of GSE debt. Large losses related to this debt would result in banks being undercapitalized, forcing them to restrict their lending and raise more capital.

For these reasons, no one in Washington believes the government will allow the two GSEs to fail. Exactly how the GSEs get from here to health, however, will have implications for the on-going ability of America’s small businesses to access credit, making reforms like the built in gains tax relief even more critical

Small Business and Inflation

Your intrepid S Corporation staff spoke with some S corporation pizza parlor owners last month. The parlors are part of a national chain, and the owners were concerned that while their ingredient and delivery costs had risen dramatically in the past year, the chain had not yet adjusted its prices accordingly. This tension was not sustainable and the chain was going to authorize new price structure. More expensive pizzas, they warned, are just around the corner.

We were reminded of that conversation this week when NFIB issued its increasingly-misnamed monthly Index of Small Business Optimism. At 89.2, the index continues to be in the recession zone. (Contrary to surveys of larger businesses, we would point out, that do not signal recession.) The surprise this month, however, is that inflation now tops their list of concerns. As NFIB writes:

“Since 1983, the average percent of owners citing inflation as a top problem has been 3 percent. In February 2008, 8 percent cited inflation as their top problem. By May, 17 percent said inflation was their top concern, and in June it rocketed to 20 percent.”

Higher energy and food prices are spreading to other parts of the economy and becoming an established part of people’s expectations as they make plans for next year and beyond. After a quarter century of disinflation, those experts who are warning we have turned the corner and are entering an inflationary cycle are beginning to look very smart.