If ever there was a phrase to describe the Obama administration’s handling of the economy, this line from an audit by Neil Barofsky, the special inspector general for the government’s Troubled Asset Relief Program may work best: “[B]ased on a theory and without sufficient consideration of the decision’s broader economic impact.” How else to define Democrats’ efforts this week to create the “Small Business Lending Fund”? Touted as a means to open up lending for credit-starved small businesses, in practice this fund would continue the very politicization of the financial industry that has voters upset and the economy in shambles. Senate Republicans have so far been successful at blocking this bill, but Senate Majority Leader Harry Reid hopes to bring it to a test vote on Monday.
The fund would allow the Treasury Department to use $30 billion in taxpayer dollars to throw into community banks — those with less than $10 billion in total assets. But this money comes with strings attached. Stephen Spruiell of National Review notes that each recipient bank applying for funds would be required to submit a small-business lending plan to “describe how the applicant’s business strategy and operating goals will allow it to address the needs of small businesses in the areas it serves, as well as a plan to provide linguistically and culturally appropriate outreach, where appropriate.” Linguistically and culturally appropriate? Treasury would also have to prioritize banks that serve “small businesses that are minority-, veteran-, and women-owned and that also serve low- and moderate-income, minority, and other underserved or rural communities.” In other words, political factors replace creditworthiness in deciding who gets loans. This is the same path that created the housing crisis and the Great Recession of 2008 from which America has yet to recover.
This bill blithely ignores that good banks make loans based on good credit. Under the Small Business Lending Fund, good banks “encourage” loaning to those who are “culturally appropriate,” no matter what the economic effect (or the recipients’ ability to repay), especially on those the bill purports to help. In fact, as noted by Barofsky, when the Obama administration directed General Motors and Chrysler to close dealerships, some were retained solely because they were “minority- or woman-owned.” Those who didn’t make the ideological cut, on the other hand, lost their businesses.
We already know the dangers of encouraging lenders to lower lending standards by dangling taxpayer dollars before them: Peter Wallison of the American Enterprise Institute notes that almost two-thirds of all bad mortgages, many of which are now defaulting, were created to satisfy government requirements or to get government largesse. It is always best to be wary of Washington politicians and bureaucrats bearing gifts.
