09/05/2012 08:37 am ET Updated Nov 05, 2012

Banking Blues

"A bank," said Bob Hope, "is a place that will lend you money if you can prove that you don't need it."

Fed Chairman Ben Bernanke is even now pondering creative ways to inject even more ready cash into the system to head off recession, but the real problem is getting the banks to loan that money to consumers and businesses.

This was probably inevitable that after the mortgage lending binge that fostered the housing bubble that finally blew up. Now the banks are overreacting by becoming super-cautious about making new loans. They have swapped one extreme mindset for another.

A case in point - a good friend of mine with spotless credit and substantial cash assets applied to refinance his home mortgage at a lower rate. Given that his house is worth about triple what he owes on it, it seemed a routine transaction. But week after week, he receives notices from the lender demanding yet more information about his financial situation. My friend cannot resist commenting on the apparent insanity of the process. "I am not asking for new money," he told me. "I already have a mortgage with them; I just want to refinance it at a lower rate. If they really believe I am a credit risk, I should think they would want to do the refinance to lower my monthly payment and reduce the likelihood of default."

If a financially solid citizen has so much trouble making a routine transaction like this, what does that say about the small businesses out there scrambling to make payroll and keep their doors open. Many if not most small businesses have narrow fiscal margins. Even when things are going well, they depend on bank loans for new equipment or to bridge inevitable downturns.

Also, loaning to small businesses is often as much an act of faith as of judgment. Many small firms simply do not have sufficient equity to guarantee repayment of loans. They often have relationships with their bankers akin to what they have with physicians or clergy. They are based less on assets than trust and confidence.

What's going on now is undercutting that traditional relationship between small businesses and bankers. The loan officers know their clients and have a pretty good idea who is trustworthy, but senior management is imposing draconian requirements that demand, in effect, that small business borrowers prove they don't need the money.

We really need to get past this Catch-22 mindset, and soon. Small business is a critical sector of our economy, producing a disproportionate share of new jobs. Small firms are often a seedbed of new ideas and innovations. Some of them are the large firms of the future. Ben Bernanke should spend less time figuring out ways to make more money available to the banks, and more time figuring out ways to get the banks to move the money along.

Jerry Jasinowski, an economist and author, served as President of the National Association of Manufacturers for 14 years and later The Manufacturing Institute. Jerry is available for speaking engagements.