Senate Democrats (plus Republican George Voinovich) look ready to pass a bill that would push another TARP-like infusion of capital into the banking system, on the theory that the banks don’t have enough money to lend, or, if they do have enough, that they are not making enough loans to small businesses and need to be provided better incentives to do so. To that end, the Small Business Lending Fund would allow the Treasury Department to make up to $30 billion in credit available to small community banks at varying rates of interest: The more politically conforming loans the banks make, the less in interest they pay. Banks that “plan to provide linguistically and culturally appropriate outreach” would receive special consideration, of course, as would banks that are “minority-, veteran-, and women-owned and that also serve low- and moderate-income, minority, and other underserved or rural communities.”
Let’s put aside all other considerations for a moment and consider why some community banks might be in need of additional capital: In most cases, it is because they made a big batch of imprudent real-estate loans that went sour when the housing bubble burst, and now nobody but the government is willing to invest in their sinking ships. In many additional cases, these banks put profitability on an equal footing with the pursuit of some social mission, be it the expansion of credit to low-income communities or the creation of green jobs, and this “double bottom line” business model proved unsustainable. These banks have shown themselves to be remarkably poor stewards of capital; the Democrats nevertheless wish to reward them for their politically correct capitalism.
Next let’s consider why other, sounder community banks might be hesitant to make new loans to small businesses. First and foremost, the administration and Congress spent close to a trillion dollars in stimulus money and failed to deliver their promised recovery, leading to a dim and uncertain economic outlook: In addition to significant consumer deleveraging, businesses must now nervously await significant government deleveraging as well, which will almost certainly entail higher taxes. Second, the effects of the administration’s health-care bill are already falling heavily upon small businesses: One by one, health-insurance companies are starting to announce stomach-turning increases in next year’s individual and small-group premiums — the bill coming due on Obamacare’s promises of “free” preventive care and the like. Finally, a great deal of uncertainty remains over the future of energy policy: Obama’s Environmental Protection Agency has indicated that it will unilaterally regulate carbon emissions if Congress fails to act.
Now step back and take another look at the Small Business Lending Fund in this broader context. Those community banks that are most eager to borrow from the fund are more interested in political protection than profits. They will gladly lend according to the administration’s “linguistically and culturally appropriate” guidelines, even though that’s how many of them came to be undercapitalized in the first place. Meanwhile, those community banks that have responded to the weak economy with an appropriate and measured reticence to lend are unlikely to take the money, anyway. This administration has thrown wild pitch after wild pitch at the productive economy: They may want to play ball, but why would these banks voluntarily lean into the plate?
Government borrowing represents saving taking place elsewhere in the economy; through the Small Business Lending Program, the government would be transforming low-risk Treasury bonds into high-risk small-business loans through a politically favored private intermediary. Perhaps no policy idea the administration has come up with better illustrates the incoherence of its economic approach, pointing like a neon arrow toward its central fallacy: The more the government invites insolvency by engaging in this kind of fiscal alchemy, the more low-risk saving the private sector will do as it braces for an uncertain future. If our current fiscal direction does not change and we continue to speed toward a budgetary train wreck, those investors eventually will have to find something safer than U.S. government bonds in which to invest. At that point, the government will have to worry more about its ability to borrow money than its grand plans to lend it.