President Obama's Big Fail on Small Business Lending
As the nation sank into the Great Depression in 1932, President Franklin D. Roosevelt spelled out what needed to be done to get people back to work: "The country demands bold, persistent experimentation," he said. "It is common sense to take a method and try it: If it fails, admit it frankly and try another. But above all, try something," he implored.
The quote isn't quite as well known as Roosevelt's famous promise of a "New Deal," but it's being bandied about a lot these days in Washington. At a recent hearing before the House Small Business Committee on the roiling small business credit crunch, Treasury Secretary Timothy Geithner was the latest to quote America's great Depression-era president.
"We're up here trying a lot of different things," he assured the committee. "You know Roosevelt said in the Great Depression, if I'm not mistaken, what the country needs is bold experimentation, and we are experimenting with the best mix of things that we think will help."
He was referring, of course, to the Small Business Jobs and Credit Act of 2010. It's President Obama's "bold experiment" to break the credit crunch stymieing small business hiring and dragging out the recovery. Two cornerstones of the act are the $30 billion Small Business Lending Fund (SBLF) and the State Small Business Credit Initiative (SSBCI). Both are designed to break the logjam preventing small businesses from getting loans at Main Street banks.
The president signed the measure into law six months ago. So what has this "bold experiment" yielded to alleviate the crisis? Well … nothing. Not a single lender has received funding under the SBLF. In fact, only 10 percent of the nation's 8,000 eligible banks have even bothered to apply for the funds. Meanwhile, 48 states have sought capital from the SSBCI program, but only 10 have received funding.
Rep. Jaime Herrera Beutler, R-Wash., said several credit-worthy community banks and credit unions in her district have appealed to her for help getting some kind of response from the Treasury Department. But six months on, they have heard nothing from Geithner's department, she said.
"Correct me if I'm wrong, but I thought the whole purpose of getting this small bit of cash infusion to those small community banks to get out to small businesses in a short term was the goal. What is happening with the money? And can you give us a time guarantee, because it should not take this long?" she asked.
As ever, Geithner was artful, articulate, and ever so slightly admonishing in his response. "I wish it was otherwise, but we're doing what you'd want us to do, what you'd expect us to do, and what you would hold us accountable for; we are being responsible with the taxpayers' money," he said.
Without a doubt, no one wants to see the government act irresponsibly with taxpayers' money. But rewind to 2008 when the financial system was collapsing. The government ginned up the Troubled Asset Relief Program, also known as TARP, and forced the money on big banks.
Treasury made no effort to monitor the $700 billion in TARP funds doled out to 364 banks, despite repeated requests by oversight panels. In many cases, the government demanded that banks take the money, even if they didn't want it. In fact, Treasury doled out tens of millions of dollars on nothing more than a banker's signature on a blank piece of paper, according to reports at the time.
Say what you will, when the financial system was in deep distress, Treasury pulled out all stops to get money into circulation as quickly as it could. Since then, the abuses spawned by TARP have been well documented, so the point isn't to treat the small business loan fund the same way. But there must be some middle ground between the big bank's unrestricted access to TARP and the tedious bureaucratic logjam facing small banks trying to access the SBLF's paltry $30 billion.
To her credit, Beutler continued to press the treasury secretary on the need for action: "I'm talking about creditworthy institutions that cannot get a response from your office on whether or not they are approved or not approved," she said. "It's been six months."
But Geithner effectively washed Treasury's hands of the problem. Instead he blamed, who else, the bureaucrats. "The reason why people haven't heard from us yet is because we depend on these regulators to review these applications," he responded. "We don't even see them until they make that review, and when we see them, we'll look at them and we'll make that judgment as quickly as we can."
Meanwhile, Main Street businesses are caught between a rock and a hard place. At a separate hearing, Lynn Ozer, executive vice president of Susquehanna Bank in Pottstown, Pa., described what she called a "perfect storm" stifling lending at the local level.
Community banks are saddled with fewer earning assets because of problem loans, increased capital requirements imposed by regulators, and higher expenses, in part, because of additional FDIC insurance costs to cover problem banks. "So how does a financial institution make its regulatory capital ratios comply with the new requirements when it cannot raise capital? The institution shrinks its assets down so the capital that it has becomes a greater percentage of its total assets. And that is exactly what the commercial banking industry has done," she explained.
In fact, lending is now below June 2006 levels, declining by $15 billion in the most recent quarter, the committee's ranking member Nydia Velasquez, D-N.Y., noted in an opening statement. Total small business loans fell 2.4 percent from $624 billion in Dec. 2010 to $609 billion in March 2011. Small loans of less than $100,000 were down by 2.9 percent, while large loans outstanding declined by 2.2 percent.
As for the economy, it remains mired in a "soft patch" that may not be temporary. Consumer spending -- the key driver of small business sales -- remains in the "new normal" range of 2009-2010, far below the recession spending levels of 2008, testified Gallup Organization Chief Economist Dennis Jacobe.
He said the nation is effectively at a crossroads. It faces a "real danger of stagflation" and lingering high unemployment for months to come, or it could see a potential "explosion" in new jobs under the right conditions. For example, a recent Gallup poll found that 42 percent of small businesses hired fewer new employees than they really needed last year, which helps explain 2010's anemic job growth.
"Just imagine if business owners … decided to meet those needs," Jacobe said. Such a change would create a virtual job explosion far exceeding anything currently anticipated, and the economy would gain momentum quickly. Right now that's not happening because small firms are too worried about future revenues, cash flow, access to capital, and rising expenses.
In short, the situation calls for bold experimentation by the government, the kind that Roosevelt would have imagined, to spur the economy; not the phony bureaucratic kind represented by President Obama's tepid, red-tape snarled, small business initiative.
