Someone in the White House should tell President Obama that every time he speaks on television about the economy or some new government program to artificially prop it up, the Stock Market tanks. Today he did it again.
Obama has determined that the government via the Small Business Administration (SBA) is now going to guarantee small business loans up to $5 million. Those loans can be used not only to purchase inventory and equipment, as was the typical limitation in the past, but also now to finance real estate. Brilliant idea. Not!
So, now the government can stick its fingers into another potential real estate rathole which hasn't worked in the past. Obama again has the uncanny knack of devising "solutions" that will end up socializing loan losses and privatizing business profits.
How is the government going to determine who qualifies for new SBA loans when banks are unwilling to lend to small businesses themselves? Perhaps the banks have good reason not to lend given the current uncertainties in the economy. Perhaps banks have learned their lesson that lending to questionably capitalized and non-creditworthy borrowers carries consequences.
Regardless of the lessons to be learned from the financial crisis, Obama is either oblivious to them or simply ignoring them for political expediency. His rationale for doing so is that since the banks won't loan to small businesses the government must do so instead. Is that a new form of underwriting standard: banks won't lend to prospective borrowers so the government should or must lend. Seems unwise and fraught with risk by me.
As a consequence, Obama is not allowing the free market system to function. In difficult economic times, unfortunately, lenders are forced to tighten lending standards and many businesses cannot obtain funding. But to put taxpayer money at risk when private lenders are unwilling to underwrite the same risks that the SBA will surely undertake sounds like a repeat of the Fannnie Mae/Freddie Mac debacle admittedly on a smaller scale.
While small business is usually the biggest generator of new jobs, the vast majority of small businesses fail with a few years. Government should recognize as private lenders do the risks inherent in lending to most small businesses and act in a prudent manner. The government has an incredibly poor track record of managing loan portfolios (again I note the above-mentioned GSEs). Why is it that Obama now believes that government will do a better job as the risk profile for many SBA loans and the potential for significant losses continues to increase? And why does Obama believe that companies formed as a result of SBA loans will actually generate sustainable job except in very limited instances, consistent with the average life cycle of such companies.
Disclosure: No position in FRE or FNM