Senate OKs $30 Billion Loan FundSeptember 22nd, 2010 by Lee Eldridge
Oh it’s funny how things change in politics. The Senate recently passed The Small Business Jobs Act of 2010 by a vote of 61 to 38. The democrats received help from two republicans to pass the bill — George Voinovich of Ohio and George LeMieux of Florida. The bill will likely pass the House soon. This is the type of bill that would typically receive republican support — tax cuts and help for small businesses. However, this is a strange year for politics, and most republicans fought against this bill. (Read the specifics of the bill in the piece in the NYTimes.)
While the bill includes a few targeted tax breaks for small businesses, the emphasis of the bill is to provide funding to help the SBA and community banks make loans to small businesses. In theory I think this bill is fine, and well intentioned. In practicality, I’m not sure it will do much.
Why? Because this assumes that the banks don’t have money to loan. Yet when I see bankers interviewed, and having talked to bankers in my own community, the problem is not the availability of funds. The problem is finding borrowers who are stable enough to repay loans. In other words, the banks are attempting to avoid lending money to people who may not be able to repay it. They’re avoiding “risky” loans.
For the last 15-20 years, banks have been encouraged by our government (even rewarded by our government) to lend money to families and businesses who in the past may not have been able to qualify for loans. But once the financial industry started falling apart, the government demonized the banks for providing these risky loans. So what did the banks do? They stopped providing risky loans. Now the government is urging the banks to loan money, even if it means providing higher-risk loans again.
Isn’t that what got us in trouble in the first place?
In this bill, the government is providing a 90% guarantee to the SBA for their most popular loans. The are taking the “risk” out of the loan for the SBA, which ultimately means that when these loans default, the taxpayer will again be left holding the bag.