We do not, it appears, ever learn from our mistakes. If we did, we wouldn’t be mired in a ridiculously absurd debate over the availability of business credit.
In the last few weeks, President Barack Obama announced plans for making billions of dollars available to community banks to repurpose as business loans. The president’s position is that companies need credit and capital to expand, and that our economy will remain stagnant until those companies get that credit. Since banks are not pouring out the cash to small businesses, his plan is to give them the money to do so.
The president is a highly educated man, and we presume that somewhere along his path of learning took a course in logic, or at least became familiar with its precepts. Let us look, then, at the fallacies of both the president’s premise, and of his logic.
The premise is that lots of creditworthy companies are clamoring for loans, and that banks either don’t have the money to lend to them, or the will. But while some banks around the nation are having troubles, the majority are well-capitalized. Moreover, their best source of profit is from good commercial loans: they tend to be for lots of money, at good interest rates, and they are often rolled over repeatedly, becoming something of an annuity for a lender. Banks want to make loans. It’s what they’re here to do.
But banks also want to get paid back on those loans. And that’s where the difficulties begin. Just because a company wants to borrow doesn’t mean it should – at least not from a federally-insured institution.
In a down economy, companies who see their fortunes lagging are more inclined to head to the banker’s window. But what the banker sees when those companies get there are firms whose revenues are in decline (and sometimes non-existent), who haven’t laid out a cogent business plan for recovery, and who haven’t always managed their firms to maximize the balance sheet. Many have structured their finances to show losses, so that they could pay as little as possible to the Internal Revenue Service. They are then surprised when those same tax returns work against them as they assert to the banker that they’re actually much more profitable than they told the government. They then complain to the government they cheated out of tax revenue that the bankers are not being fair to them.
Even where bankers want to be broad-minded about such things, they face federal regulators who are not. Bankers who take on extra risk, or make loans in which the financial documentation is sketchy, get clobbered by regulators for putting their institutions at risk.
Bankers want to make commercial loans. And they do so, every day – to companies that have the demonstrable capability of paying the money back.
The call to loosen lending to subprime commercial borrowers sounds an awful lot like the political rhetoric to “increase homeownership.” That initiative asserted that there wasn’t enough mortgage money being put out to riskier homebuyers – and that we needed people to buy homes because that was the key to growing the economy and to creating stable families. The government got in on that action, too, pushing Fannie Mae and Freddie Mac so deep into buying risky home loans that they, and we, are now drowning in failed debt.
Coughing up a giant wad of money to lend to struggling businesses isn’t going to change what those businesses are struggling against. If there are no orders from customers, having more cash to burn through while waiting for the economic tide to turn isn’t going to end well for either borrower or lender – nor taxpayer, for that matter.
The hue and cry for more business loans is an echo of the mistake we made with the housing market. We can still hear the anguish that came from that mistake. We’re just not listening to it as we ratchet up the volume in the oratory of throwing good money after bad business.
