Blowing In The Wind
Today, U.S. Treasury Secretary Timothy Geithner testified before the U.S. Senate Banking Committee. I watched the hearing in its entirety and was amazed that 80% of the questions the senators put to Mr. Geithner concerned small business lending. The senators made it clear that this was a major issue of concern to their constituents. Committee Chairman Senator Chris Dodd of Connecticut opened the session by asking what could be done to “catalyze more small business lending”. On the one hand, I was heartened to see that the senators clearly got the message that their constituents were outraged about the Troubled Asset Relief Program (“TARP”), the bailouts of large, irresponsible financial institutions, and the choking off of credit to the small business sector, which creates more than half of all employment in the U.S.
But at the same time, the federal government appears to be at odds with itself and is pursuing measures that can undermine its stated policy goal of unblocking credit to the small business sector.
Consider the opening statement of Secretary Geithner (the text of his remarks is available on the website of the U.S. Treasury) in which he announced that Treasury policies, including raising the amount of guaranteed loan principal to 90% and reducing or eliminating fees, raised weekly loan volumes of the U.S. Small Business Administration (“SBA”) by over 25 percent since March 16. In fact, loan volumes on March 16, or at any other date in 2009, were anemic. This is not the right baseline for comparison and suggests that the Treasury Secretary is attempting to manage public perceptions rather than confront the problem.
Another concern is that the Treasury and the SBA appear to be on a different timeline than the small business owners reporting their “frustration” (Chairman Dodd’s term) to their elected representatives. Secretary Geithner reported a start in the small business emergency loans that Congress had authorized in February’s stimulus bill. The SBA has been working since then to draft guidance for this program to distribute to the banks by June 8. They intend to accept loan applications starting June 15. Cashflow is critical to a business and an economic disaster is not terribly different from a natural or other man-made disaster. Consider that after the 1993 bombing in the World Trade Center, of those small businesses that could not resume operations and cash flow within five days, 90% of them were out of business one year later. The fact that the SBA took four months to develop guidance to disburse loans enabled by legislation passed in February suggests that it doesn’t have a sense of urgency.
Another issue that Secretary Geithner raised in his testimony was that guarantees on SBA loans had been raised from 80% to 90%. The most recently reported default rate on the SBA loan portfolio was 12%. Now the taxpayer will be on the hook for a higher amount of bad loans. Presumably, bank executives are sufficiently savvy to know how the public will assign blame for that. If you don’t want to be on the other end of the pitchfork, intertia is a sensible response to the government’s various initiatives.
