Programs to get small business lending moving aren’t working. Instead of a resurgence of small business lending the situation is getting worse.
Last week the Wall Street Journal reported that the White House was searching for ways to help small business by unlocking frozen credit. This week CIT, the largest small business lender in the U.S., fought for survival. Funds just aren’t getting to small business.
I believe that the Obama Administration has good intentions and is trying hard to do the right thing but is tragically out of touch with the real world. Obama, Summers and Geithner lack of actual business experience and haven’t figured out that no matter how smart they are there is no substitute for real life. Studying small business lenders and small business just isn’t the same thing as running a business and until they get someone to help them who has real world experience they are going to continue to flounder.
In February and March I warned that programs to get small business lending going weren’t going to work. I thought that they were DOA and I was correct.
Soon after becoming Treasury Secretary Geithner observed that most small business lending was funded through the “shadow banking system”, i.e., non-bank lenders. Yet, Obama’s recovery plans ignored non-bank lenders and instead focused upon pushing banks to lend even though they weren’t the primary source of lending before the crisis began. Recovery plans also relied upon the SBA to get liquidity into the hands of businessmen. Unfortunately the SBA hasn’t been relevant or effective since the Reagan Administration.
Back in February I thought that Geithner was a quick learner and that he would ditch policy alternatives that didn’t work. I was wrong. The Administration continues to operate in their “comfort zone” which is banking even thought the small business lending crisis is playing itself out in the non-bank financial company arena.
Below are the four suggestions that I made in February to help small business lending. These appeared in an article I wrote in February and was the first in a small business lending series written by myself and Rob Blum. Each of the articles can be read by hitting this link, this link and this link. Also, I wrote an article for Forbes.com which can be read by hitting this link.
Form new government sponsored financial guaranty and bond insurance companies. The failure of the financial guaranty and bond insurance industry led the U.S. into the financial crisis and the restarting of this industry will help lead America out. These insurance companies work because they create operating efficiency for investors and back up their work by assuming risk. The bond insurers serve a function similar to rating agencies but unlike rating agencies, the bond insurers align their interests with investors by putting “skin” in the game. Bond insurers were essential to the capital markets for decades. Newly formed and well capitalized bond insurance companies can be started by Treasury in a matter of weeks and, if formed, will help restarting lending.
Amend the mutual fund and tax laws to promote the formation of tax efficient pools of investment money for lending. The interplay of the laws governing mutual funds and taxes make it difficult, if not impossible, for investors to form tax efficient investment pools that originate and own high quality commercial and consumer loans. The laws are antiquated, restrict capital formation, inadvertently encourage risky behavior and make little common sense. A passive investment in a non-mutual fund direct lending pool can have disastrous tax consequences for foreigners, not for profits, pension funds and individuals (because of state taxation issues in the case of individuals). And, the laws regulating mutual funds have the unintended side effect of encouraging risky behavior instead of prudent lending. Geithner can fix these laws and encourage the formation of investment capital to restart lending. And, there will be no impact on Federal spending.
Expand the Community Development Financial Institutions Fund. Every year the IRS grants several billion of tax credits to lenders through the Community Development Financial Institutions Fund (“CDIF”). This program is supposed to encourage economic development through tax credits that are earned by lending in low income and blighted areas. Unfortunately, over the years the CDIF has favored real estate related lending rather than core business lending. If CDIF was reoriented to encourage business lending, an existing program that is annually costing taxpayers billions could be converted into an important tool to restart commercial finance.
Encourage the SBA to license non-bank lenders and update and modernize the program. The last non-bank lender to receive a new “Section 7A” license was during the Reagan Administration. Under pressure from critics, SBA programs have been cut back year after year and are almost totally dependent upon banks. The SBA lending industry is almost virtually irrelevant.
30 years ago the SBA had a terrible reputation because its programs were badly administered. Since then the SBA has shrunk as a proportion of the economy. But, the SBA’s poor history doesn’t mean that the SBA can’t restart itself and contribute to American business health. A top down review of SBA programs with an eye towards modernization and inclusive lender eligibility, including non-bank participants, could fix the SBA.
Geithner’s current proposals won’t get bank lending going again and certainly aren’t going to get non-bank lenders excited. The Treasury Secretary needs to get out of his comfort zone and start to look at supporting non-bank lenders and investors. They make up most of the market for consumer and business loans and ignoring non-bank lenders won’t get the economy going again. 4mse9b6vyu