December 22, 2009
There is a lot of talk in the press about the difficulty small businesses are having obtaining credit. President Obama recently admonished bankers for not lending enough to small businesses. However, it seems obvious that lenders would have a more difficult time finding creditworthy borrowers during a recession. So we don’t need a politician who has demonstrated zero accountability to taxpayers second-guessing lenders, who are accountable to shareholders and markets.
Is a lack of credit a major problem facing small businesses? According to the most recent survey of small businesses by the National Federation of Independent Business, 10 percent reported problems obtaining financing and a net 15 percent reported more difficultly compared to their last attempt. But when asked what is “the single most important problem” facing their business, 32 percent of respondents cited “poor sales,” followed by taxes (24 percent), then government regulations and red tape (11 percent). “Finance and interest rates” came in at 4 percent.
In other words, the NFIB survey indicates that government -- not credit availability -- is the biggest problem facing small businesses right now.
Regardless, President Obama and members of Congress see the Small Business Administration’s lending subsidies as a solution to the supposed credit problem. The “stimulus” bill passed in February gave the SBA an extra $730 million to make more credit available to small businesses. The government guarantee on SBA’s flagship 7(a) loans was increased to 90 percent and fees intended to help offset losses were eliminated. (The legislation also created a separate program with an anticipated 60 percent default rate that has since become an embarrassment to its patron, Sen. Olympia Snowe, although politicians are rarely embarrassed by their failures.)
Not apt to pass up a practically free lunch, SBA lenders blew through the money and have been pressing Congress for more. The just passed defense appropriations bill gave the 7(a) program another $125 million to extend the higher guarantee and reduced fees. The House’s latest “jobs” bill would spend another $350 million extending the provisions through September. What’s going on is that the extra money is needed to fund the losses that will result from the loosened requirements.
According to Cato adjunct scholar, Veronique de Rugy, the SBA’s default record was already poor:
The Small Business Administration, according to its own inspector general’s Office, has a long-term default rate of roughly 17 percent. This compares to 4.3 percent for credit cards and 1.5 percent for bank loans guaranteed by the Federal Deposit Insurance Corporation.
And a recent report by the SBA’s inspector general concluded that the agency’s improper payment rate was 27 percent, not the 0.53 percent of FY 2008 program outlays it reported.
Adding insult to taxpayer injury, the SBA is largely irrelevant in the credit markets. As Veronique points out, no more than 1 percent of all small business loans are backed by the SBA. Moreover she finds that 75 percent of 7(a) loan guarantees go to about 1 percent of all small businesses in the service, retail, and wholesale sectors -- Subway franchises, for example.
In sum, the economy doesn’t need a president pressing banks to make uneconomic loans simply so that he can pretend to be doing something. Nor does it need a government agency like the SBA fostering the same sort of moral hazard that helped sparked the housing bust and recession. The small business community is telling the administration that it would like to see lower taxes and less government red tape. Unfortunately, the administration is promoting higher taxes, costly mandates, more labor regulations, and further government meddling.