This is the downside of regulations, enacted after the Great Recession, that made banks safer than ever. Unfortunately, those same regulations also caused banks to focus on mortgages and publicly traded loans, rather than lending to growing private companies. This dislocation may explain why the economic recovery since 2007 has been the most tepid in the past 50 years.

Middle market companies in the U.S., defined as companies with between $10 million and $100 million in revenues, account for 24.6 percent of all U.S. jobs and almost $6 trillion in total revenues. These 351,148 companies have been left behind by requirements that banks hold larger reserves against potential losses. This effectively penalizes banks for providing customized loans to private companies which must be retained on their books, and encourages banks to engage in activities that can be bundled up and sold to investors. Banks today will also lend to companies owned by private equity firms, because they are deemed to be less “risky” since they are under the control of professional investors, who have become huge players in buying control of middle market companies.

So when you operate a firm independently or family-owned and without a major financial sponsor such as a private equity firm, you fall under the category of “non-sponsored.” If you’re “non-sponsored,” banks won’t lend you enough to grow to seize the emerging opportunities in the economy.

The result: while large corporate behemoths like General Motors and Apple are sitting on piles of cash and still raising more with cheap debt, their suppliers and partners—smaller private companies that make car seats or manufacture iPhone accessories—don’t have financing for working capital or capital expenditures to keep up with growth.

Banks are required by regulators to hold a minimum amount of cash in reserve and they can lend the rest to borrowers. Under Basel III rules adopted by the Federal Reserve, banks are required to hold at least 8 percent of cash against the simplified measures of risk in their loan portfolios as determined by the regulations. Prior to Basel III, the minimum was 2 percent. The result? A giant chunk of money that could be going to borrowers is now sitting idle, in bank reserves. In 2011, bank reserves zoomed to $2.6 trillion, from just $55 billion in 2008, according to the Federal Reserve.

It gets worse. For loans to small and medium-sized businesses, banks must hold up to five times more in cash reserves than for rated public debt to larger companies. If a bank makes a loan to a small business, it must hold the equivalent amount of cash in reserve in case the business defaults. In contrast, if a bank provides a commercial mortgage or a large company loan, it only needs to hold 20 percent of the value it lends. That is because those loans can be packaged and sold by the bank in large bundles to the public markets, (For those of you who have read or watched The Big Short, this process is called securitization). And for the biggest banks, which account for 95 percent of the industry, Basel III requires those institutions to maintain double the ratio of cash reserves to their total potential losses.

As a result, banks avoid unrated and highly customized middle market loans that can’t be bundled up and securitized. Instead, they now focus heavily on the syndicated loan and public bond market, where the loans range from $100 million to $1 billion. Bank lending peaked in 2000 at $500 billion in quarterly volume and remains below that level today.

In contrast, corporate bond issuance has grown from $2 trillion quarterly in 2000 to $4.5 trillion quarterly this year. Banks prefer to take lower returns from potentially risky bonds and syndicated loans because they don’t have to maintain the same level of reserves to cover potential losses. Banks can buy five times as many of these readily available bonds and syndicated loans with lower operating costs than is required to maintain a national network of loan underwriters and the required reserves.

These realities have made the local community bank an endangered creature; the number of banks in the U.S. fell from 15,000 to 5,000 over the past 30 years. The shrinking number of institutions has been driven by consolidating branch networks, community bank failures, and by the rise of non-bank finance companies specializing in consumer mortgages, once the bread-and-butter for local banks. Adding to the problem is the Dodd-Frank legislation. Named after its co-sponsors, Senator Chris Dodd and Congressman Barney Frank, the act aimed to curb the financial risk that led to the meltdown in 2008, but it has had multiple unintended consequences, among them additional costs and compliance pressures on community banks, forcing them to engage in further consolidation.

Finally, there’s the Volcker Rule, which is nested inside of Dodd-Frank. First put forth by former United States Federal Reserve Chairman Paul Volcker, the rule clamps down on banks’ ability to make speculative investments by prohibiting them from engaging in proprietary trading activity.

This rule led to the dismantling of large proprietary trading desks at major banks, which engaged in both private equity and private debt activity. That means fewer avenues of financing for mid-sized firms.

That’s why I left a career in private equity, where there is an overabundance of capital and talent chasing a handful of big ideas and too many small ones. Instead, I started a firm, Lateral Investment Management, that addresses the growth capital needs of growing and independent companies that have no private equity sponsor.

The company is built on the belief that there is a huge opportunity to partner with great owner-operated private companies that want to stay independent. Opportunities abound for growth amid upheaval in the healthcare industry, the rebirth of domestically oriented manufacturing firms, and pressing needs for infrastructure upgrades. For investors, non-bank lending to the most successful middle market companies may be the most compelling investment opportunity available today.

While the stock market continues at all time highs, the U.S. economy sputters along and struggles from the bottom up. There’s no question that the U.S. banking system is much safer than it was in 2007, but the price tag of the solutions cobbled together by the Bush and Obama administrations, Congress, and the Fed may have been more expensive than we can afford. The American ideal of the successful and thriving independent proprietor business—which has traditionally been an important engine of growth for the U.S. economy—is at risk.

The post Why Your Bank Wants No Part of Your Business appeared first on Zócalo Public Square.

Our memories are so gone that our politicians, from Gov. Brown on down, can’t stop reminding us that just a few years ago, we were in a recession and a budget crisis. So now—even with housing prices soaring, unemployment under 7 percent, and the state budget in surplus—they say they must keep higher education and social services programs at recession-era levels.

Let’s say, “Bah, humbug!” to the Sacramento Scrooges. There are more productive ways than austerity to make sure we don’t forget the economic lessons of the recent past. For starters, why not create a museum to help us remember?

California would be the ideal location for a Museum of the Great Recession.

After all, we Californians practically invented the global economic meltdown between 2007 and 2009, and the tough recovery that followed. Our middle class, in its aspirational desperation to buy houses and keep up an unaffordable standard of living, led the way to ever-growing consumer debt. And our mortgage companies—like California-based Countrywide Financial, once the nation’s largest mortgage lender—led the way in making bad subprime loans. Countrywide and its friends on Wall Street also recklessly securitized those loans, ultimately setting off a major global recession.

For all this, we Californians paid a huge price, one that a museum could remind us of: double-digit unemployment, the housing market bust, record state budget shortfalls, municipal bankruptcies, the layoffs of thousands of teachers and other public servants, and downturns in nearly every major industry in the state. Family income declined across the spectrum and income inequality surged during the recession era to the highest level in at least 30 years, according to the Public Policy Institute of California.

During this recession, middle-class Californians became a minority of the population. And California became, according to the world’s media, a failed state responsible for economic malaise from Spain to Shanghai. Part-time La Jolla resident Mitt Romney compared us to Greece.

Bottom line: This was our Great Recession, and we shouldn’t let anyone—particularly those vultures on Wall Street—claim it by opening their own museum first.

Here’s a plan to make the museum a reality. The museum director should be former California state treasurer Phil Angelides, who warned Californians about the housing bubble in 2005 and led the U.S. Financial Crisis Inquiry Commission that investigated the causes of the recession.

The commission’s excellent report on the recession’s causes could provide the content of the museum’s permanent exhibits on them—from excessive household borrowing to all the state and federal leaders who failed to see a crisis coming—with California showbiz making things more accessible.

For example, to illustrate the Federal Reserve’s failures in financial regulation, Disney could produce audio-animatronic versions of Fed chairman Ben Bernanke and New-York-Fed-chief-turned-Treasury-Secretary Tim Geithner to take visitors’ questions. Inspired by the Abraham Lincoln at Disneyland, these talking robots would have to be made more entertaining and lifelike than their human models. If that didn’t work, free energy drinks—one of the few economic success stories of the Great Recession—would be available to keep museum patrons from falling asleep.

The museum would have a theater, where re-enactors would put on a series of live shows—scenes from the failure to rescue Lehman Brothers, to real-life exchanges between homebuyers with little income and lenders giving them big mortgages anyway. Gamers could create immersive, room-sized infographics to explain the shadow banking system, credit default swaps, and that whole business with Fannie and Freddie.

The museum wouldn’t neglect the aftermath of the crisis. Visitors could don headphones and listen to real audio recordings of homebuyers who were victims of myriad mortgage mistakes battling unsuccessfully to get problems fixed. (Yes, those calls were recorded, and many of them have been preserved because of litigation.) One room could be devoted to oral histories of the millions of long-term unemployed Californians. In another, museum visitors would compete with former professional robo-signers of foreclosure affidavits to see who could review and sign more mortgage documents (without reading anything, of course) in less than a minute.

To really grab visitors, some exhibits would have to be more cultural than economic—like something on the interior decorating style of house flippers, or the fashion choices of the speculators who bought foreclosed homes at courthouse auctions. The Museum of Jurassic Technology in Culver City could curate a room devoted to Tea Party economic fantasies, credit rating agency reports, and other phony theories from the crisis. One museum room would be decorated as a child’s bedroom—but occupied by a 20-something, with green Starbucks aprons and job application cover letters littering the floor.

A gallery of Recession-Related Extinctions could include exhibits on the pre-recession days when public higher education was affordable and California was a middle-class state. Special attention would be paid to California Republicans who had to vote for the budget under the two-thirds vote requirement, which was finally eliminated with the 2010 elections. Now, the Democrats can pass a budget with a simple majority. But before 2010, those votes for the budget could end the political careers of the Republicans who made them. The story of Anthony Adams—a young Republican politician from the Inland Empire who voted for an emergency budget and now is a deputy public defender in Mendocino County—would captivate downwardly mobile Californians.

There’s another reason to put the Museum of the Great Recession in California. Our state offers so many possible locations. The museum’s supporters could buy a government building in bankrupt Stockton or San Bernardino to give those cities some much-needed cash. It could try to take over any number of malls abandoned during the recession. Or, if Californians want something glossier, the former offices of the failed IndyMac bank in Pasadena is just a short walk from the rapidly expanding Metro Gold Line.

My own preferred location would be the former Countrywide headquarters in Calabasas, just off the 101 at the western edge of the San Fernando Valley. The building, now used by Bank of America (Bank of America acquired Countrywide during the recession), has the size to be a museum, with 700 parking stalls and 230,000 square feet.

When I stopped by recently, signs said it was available for sale or lease. At a fair price—say $150 per square foot—the state could acquire it for $35 million. The state parks department could easily—and appropriately—buy it with money from the $54 million secret surplus it had accumulated (and saw exposed after the recession). And there’d still be money left over for operations.

But I suspect this museum could pay for itself. The current rage for financial education would make the Museum of the Great Recession a natural for field trips. Californians have a history of supporting institutions built on economic crisis; arguably our most powerful think tank, on the Stanford campus, is named for its founder, President Herbert Hoover, who later ushered in the Great Depression.

Californians also love to visit places that offer a window on scandal. Perhaps membership at the Museum of the Great Recession could include free admission to the Hearst Castle in San Simeon, and the Nixon Library in Yorba Linda.

The post What Amnesiac California Needs Is a Museum of the Great Recession appeared first on Zócalo Public Square.