A running joke in business circles of late is that flat is the new up. Tell that to Troubled Assets Relief Program (TARP) recipients Bank of America and Citibank.

While these two banks are now arguably insolvent, and have certainly been busy eliminating or scaling back some of their more lavish-looking line items from their balance sheets – such as bonuses and destination junkets – their participation in TARP is nevertheless setting in place the next round of “too big to let fail,” only even bigger.

According to the Committee for a Responsible Federal Budget, of the $296 billion in TARP funds as part of the $700 billion stimulus package, $52.5 billion (about 18 percent) has been allotted to Bank of America and Citibank. The New York Times reported last week that the Obama Administration has committed to pumping as much as $2.5 trillion into the financial system.

While there is no doubt that our struggling economy, including bad-mortgage perpetrator Wall Street, needs a financial shot in the arm to get the gears of lending and borrowing moving again, we must take heed against feeding “too big to let fail” to the point where the government is no longer able to pick up the pieces.

President Obama’s signing this week of Congress’ $787 billion stimulus plan into law, even though it is aimed at helping taxpayers, homeowners and the overall economy, may be a start in the right direction. As Forbes has reported, the aid package includes $1 billion in relief for small businesses. Enterprises that make less than $15 million a year can carry back 2008 losses to reduce taxes paid over the last five years. Small firms will also be able to write off up to $125,000 in capital investments per year over the next decade.

But the questions remain: Is it enough relief for small businesses, which represent over 99 percent of U.S. firms according to the SBA? And does it do enough from the bottom up instead of from the top down, as has been the mentality from Washington and Wall Street over much of the last decade?

Former President Bill Clinton and Montana Sen. Jon Tester have both come out in recent weeks with strong pushes for bringing the leaders of small community banks to the table in a bigger way as Washington grapples with how best to stimulate the economy. “They’ve done a great job and we need to make sure they continue to do a great job,” Tester told Rachel Maddow on her show on MSNBC last week. “They’re much closer to the customer than a lot of these big guys and they need to be part of the solution, too.”

As we reported in November, two of our Top Small Workplaces the last two years – 2007 winner Phelps County Bank in Missouri and 2008 winner Paducah Bank & Trust in Kentucky – define these ready participants. Despite falling consumer confidence and spending and frozen credit markets that are hurting many of their small business clients, these two banks have continued to have banner years in 2008 and so far in 2009.

The table below shows how they’re currently doing on some key metrics, compared to November 2008:

Metric Phelps Paducah Bank
Revenue +14.83% +16.3%
Deposits +3.95% +5.7%
Bond portfolio +77% +20.5%
Net interest margin +8.8% +10.9%
Market share +4.3% (to 29.1%) n/a (still 31.9%)

Both banks achieved these results while keeping employee turnover very low; Paducah Bank had less than 1 percent turnover and Phelps had slightly more, but only because of a few retirements and student employees finishing school.

Neither bank reported using any “share the pain” initiatives, such as those we touched on in this column last month, to cut operating costs.

“We essentially have been able to continue business as usual as we never participated in the relaxing of credit standards and high leverage prevalent in our industry over the last decade,” Dallas Wells, an employee-owner at Phelps, tells us. Yet, even though the bank continues to do well, Wells says they’re very pessimistic about the state of the economy this year. Their goal is to improve earnings slightly while adding to their loan loss reserves. Paducah Bank reports similar goals in light of the current climate.

Should small banks have a seat at the table when major discussions take place moving forward regarding the financial system and economic stimulus? We believe they have shown foresight, discretion and responsible management both before and during the current crisis that gives them that right. Further, how much should the country invest in fixing what is broken rather than strengthening the part of the economy that is functioning effectively?