What would better motivate a solvent bank to lend money to a credit-worthy small business: (a) profit, or (b) a speech from the President of the United States? If your answer was (b), you might qualify for work in the White House.
To see what is wrong with the President's economic thinking, such as it is, we have to look no further than the President's Saturday speech on small businesses. Profit, the President suggested, is an insufficient motive for banks to lend money to credit-worthy small businesses. Therefore, the President must press them to make loans for patriotism.
"But while credit may be more available for large businesses, too many small business owners are still struggling to get the credit they need," Obama said in his weekly radio address. "These are the very taxpayers who stood by America's banks in a crisis -- and now it's time for our banks to stand by credit-worthy small businesses, and make the loans they need to open their doors, grow their operations, and create new jobs. It's time for those banks to fulfill their responsibility to help ensure a wider recovery, a more secure system, and a more broadly shared prosperity. And we're going to take every appropriate step to encourage them to meet those responsibilities."
I'm not one to casually throw around the "socialist" label. But let's look carefully at that statement. Banks, the President insists, have a "responsibility to help ensure a wider recovery" and "a more broadly shared prosperity."
That would be news to bank shareholders. You know who they are. They're the ones who invested their own money or other people's money (your retirement savings) in hope of getting more back. What of the banks' responsibility to them? Obama doesn't mention it.
Instead, the President asks banks to put those considerations aside and lend money to small businesses on the premise that the loan will not return money to shareholders, but will "spread the wealth around."
He does not just ask them to do this. He says it is their "responsibility" to do it. And to make sure they do their duty, the President has a plan. The plan is: pay banks to lend to small businesses. I know, that's only an outline of a plan. But that's all the President has.
He unveiled this outline at a Maryland speech a few days before his radio address. There, he said he would appoint a committee "to determine what additional steps we can take to get credit flowing to small businesses that want to expand."
Basically, Obama wants Washington to loan money to community banks that come up with a new plan to loan money to small businesses. His incentive would be to drop the interest on that loan from 5 percent to 3. He also announced that he supports Sen. Olympia Snowe's plan to raise loan limits for certain SBA loans. Not that he needs Snowe's help getting other legislation passed, or anything like that. He just thinks this is a really great idea.
A few questions come to mind. If giving banks financial incentives to lend to small businesses is the right path, then why the rhetorical call to their patriotism? Why suggest they are being bad Americans if they don't lend more money than they are lending now? Unless, of course, you really believe they are bad Americans.
And what evidence does the President have that banks are (a) not lending "enough" to small businesses (who, besides bank executives, decides what "enough" is), and (b) that such decisions are bad ones? Would it be better to lend money to a small business or a homeowner? A small business or a large one? By what criteria does the President determine which loans a bank should make?
Many economists and analysts believe that the recession we are in was caused in large part by financial institutions making loans for bad -- primarily political -- reasons to people who had no business getting loans. The President is arguing for a return to precisely that same scenario.
What could possibly go wrong?
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