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  • A Pledge Small Businesses Do Not Need

    Facing the stark reality of double-digit unemployment and the failure of his first $862 billion economic stimulus, President Barack Obama unveiled his second stimulus plan last month including a mix of subsidies and government-subsidized loans targeted solely at small business. Obama’s Second stimulus will be funded in part by roughly $33 billion from the TARP, that will be then redirected to community banks through the Federal Small Business Administration (SBA).

    While the aim of promoting job growth through the “acceleration” of small business creation and expansion is laudable, businesses do not want more government intrusion.  Unfortunately, in an attempt to stimulate job creation and small business growth, the last round of pledges from the White House will only further expand government regulation over business.

    Small business certainly comprises a large share of total employers in the US economy and as small businesses expand—or originate—there is more employment in local economies.  It is not clear, however, that there is a direct link between the loan guarantees provided through the SBA and the volume of small business lending in local markets

    Most importantly, despite holding nearly $90 billion in total loans (an increase of 70 percent since 2001), the SBA’s system of lending has fallen short on its ability to keep up with industry standards where the average quality of an SBA federally-guaranteed loan (in 2008 corresponding to a Moody’s rating of Ba) falls below that of a typical private, non-government subsidized loan. In a 2009 report, the Government Accountability Office discovered that the “SBA does not follow sound validation practices or use its own data to independently assess the risk ratings, the effectiveness of its lender risk rating system…may deteriorate as economic conditions and industry trends change over time.”

    In addition, the President is promising that the SBA will guarantee the loans dispersed under this new round of stimulus spending at the 90 percent level.  Considering the mounting evidence against the ability of SBA to maintain industry standards, this should be worrisome to the American taxpayer since they subsidize these loans—under the current lending structure, SBA guarantees up to 90 percent that SBA lenders make to small businesses.

    Leaving aside the fact that the SBA has a poor track record of targeting effective loans and overseeing these loans it is vital to reiterate that small businesses will continue to react to uncertainty. The most pressing issue for every American is ensuring that the economy and net employment begins to rebound.

    Rather than entertaining poorly targeted policies, the White House and Congress should be spending time assuring American businesses that they are committed to a policy mix centered on permanently lowering capital gains tax rates, income tax rates, the estate tax, as well as mitigating regulation and employer mandates which would give businesses the necessary incentives to innovate and expand in the most efficient manner.

    Posted in Economics [slideshow_deploy]

    2 Responses to A Pledge Small Businesses Do Not Need

    1. Stephen G, Chicago says:

      The Left knows that the way to change a society from within is to focus on economics (and fundamentally alter the way the nation thinks about and handles economics).

      Conservatives MUST wake up and begin again to make the case for free enterprise and its intrinsic link to political and religious freedom.

      THIS is the column that explains how conservatives can do just that: http://rjmoeller.com/2010/02/the-economics-of-mer

    2. Ron Sturgeon, Texas says:

      So Obama is going to free up the loans to small businesses?

      The Banking System Doesn’t Need More Money

      As a small business owner with a lot of friends who also own small businesses, I get tired of hearing all the news stories about how small business lending is going to get a shot in the arm from President Obama’s programs or any other source in the foreseeable future. Yesterday I listened to a speaker from one of the large banks talk about how many loans the bank was making, doing its share to get the country moving again. All the banks are simply not making business loans unless they are absolutely gold-plated. Period. This isn’t because they don’t want to make loans; it’s because they’re being criticized by examiners.

      The regulators have made it clear to banks that they will be criticized for any loan where the borrower takes out any cash, regardless of the underlying fundamentals or collateral. This is nonsensical.

      I understand that real estate is depressed, and that values are uncertain, and that tenants are moving, and all the other fundamentals.

      The answer is simple: The regulators need to relax—not on every loan, but use some common sense!

      I feel for all the small businesses in America that are crippled. They dont understand why their debt free building isnt worth anything for collateral on a loan, or why their receivables which have deteriorated only slightly are now not worth anything as collateral.

      Here’s the simple truth from one of the “little guys” in a small business who sees the misery here in the street, and just can’t relate to our government’s plan to put more money in the system. There is plenty of money out there; someone just needs to stop sitting on it, after the regulators tell them it’s ok to lend some with solid underwriting policies.

      This story has been truncated, see the whole story at: http://www.mrmissionpossible.com/blog/auto-salvag

      Ron Sturgeon

      5940 Eden

      Ft. Worth TX 76117

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