…by Meg White
The place Meg puts the stuff she wrote
Too Integral to Fail: Why Community Banks and Small Businesses Should Be Getting More Attention than Goldman and Morgan
Categories: Commentary, Economy

by Meg White

As the U.S. stock market opened this week, investors were treated to plummeting prices due to poorly-performing regional banks. While the “too big to fail” banks are trying to decide how massive their bonus checks should be and how best to avoid new regulations from the federal government, the banks that share property with the rest of us on Main Street, USA are suffering.

And just as the foreclosure of your neighbor’s house brings down the value of your own, the devaluation of your local bank makes recovery on your particular Main Street more difficult.

But if you watched any financial news this weekend, it was probably more big bank bashing than proposals to help ease the local lending crunch. While the outrage at the banks fighting hard against common-sense reforms and consumer protection, it’s tempting to slap the ungrateful brats down. The temptation was not lost on the Obama Administration; seniors aides to the president flooded the Sunday talk shows with condemnations of the industry’s recent obstinance.

But, if there’s anything in the financial world more unpopular than big banks among the average American right now, it’s the government’s Troubled Asset Relief Program (TARP), better known as the bank bailout.

So the problem becomes this: What do you do when a major key to economic recovery (loans for small businesses) is still elusive, while the main sources for the key (TARP and banks) are strongly associated with fraud and abuse?
Enter an elegant solution to this problem from Sen. Mark Warner (D-VA).

The idea is basically that some of the money the government put into the TARP fund should be reallocated to small businesses via small bankers. The most recent iteration is that $10 billion in TARP funds, $35 billion in loans from the Federal Reserve and $5 billion from the banks themselves would make $50 billion available in small business loans over the next year or two.

“Let’s take some of the TARP funds that have clearly helped Wall Street, let’s actually make sure they get down to Main Street, let’s make sure the banks have skin in the game by putting up to 10 to 20 percent and taking that first dollar loss,” Warner said about the proposal on CNBC last week. “Fifty billion dollars put into the small business lending market over the next 12 to 24 months would do a lot to make sure those small businesses are there to hire folks as this economy hopefully recovers.”

There’s no doubt that help is needed. Just last week, The New York Times detailed “what has become a ritual” of the Federal Deposit Insurance Corporation (FDIC) swooping down upon small banks and selling them off:

The pace of bank failures is expected to accelerate in the coming months. There were just 25 bank failures in 2008 and just 10 in the five previous years. But in September alone, regulators took over 11 banks in nine states that were saddled with soured commercial real estate loans.

The article also noted that situation is not only draining the FDIC but also tightening local lines of credit.

The failures are also causing cautious competitors of these failed banks to call in loans and hoard money instead of making more loans available, for fear of being the next FDIC victim due to unattractive balance sheets.

In many ways, regional banks have had it tougher in this economic downturn than large ones. Not only were they more likely to have exposed themselves to the increasingly volatile commercial real estate market, but it turns out the distribution of TARP money may have disproportionately favored larger institutions.

In a recent report from the TARP’s special inspector general Neil Barofsky, the idea that big banks had gotten an extra lift was fleshed out. The New York Times described the report as “criticizing the Treasury Department for some misleading public statements last fall and raising the possibility that it had unfairly disbursed money to the biggest banks.”

Senate Minority Leader Mitch McConnell praised Treasury earlier this month for doing just that. In a Politico article that was published on the same day as The New York Times piece previewing the IG report, he says bailing out Wall Street and the biggest banks was just what we needed. Now, all this other ancillary spending on the insurance, student loan and auto industries, that’s government intrusion into the private market.

Despite McConnell’s assertions, however, TARP only managed to keep our economy from exploding, while failing to keep American businesses from imploding. One clear example of this phenomenon is the idea of a jobless recovery. Instead of hiring people now that the economic outlook appears brighter, many companies are hunkered down, eliminating older positions and rewarding current employees with more hours rather than hiring on new ones. Furthermore, innovation and the creation of entirely new companies by necessity virtually ends when credit is unavailable.

Recent history has shown that small businesses are reliable job creation engines. Early this year, the House Committee on Small Business announced a hearing on the recovery, noting that “as the backbone of the economy, creating 80 percent of all new jobs and driving innovation in virtually every field, small businesses will be vital to the nation’s economic turnaround.”

But both Congress and the Obama Administration need to be careful, what with McConnell and his ilk out there warning of a socialist takeover of the private sector. Plus, there is a chance of corruption whenever you have the government telling a bank where and to whom it should lend. As Warner noted in an interview over the weekend on National Public Radio, “You don’t want that level of political interference.”

Last week, the Small Business Administration said that the recovery act had helped the agency support a 70 percent increase in lending. But the numbers compared to Warner’s proposal are small; only $9.2 billion in loans had been approved for small businesses under the SBA since February.

This op-ed from last week’s Orlando Sentinel slams the SBA’s new loan program, known as America’s Recovery Capital, as too small and restrictive to have a meaningful impact on struggling small businesses. Instead of the political appeal that comes with creating a shiny new program, the writer suggests, the SBA should simply lift some of the restrictions on its current financial products. Indications are that both Congress and the Obama Administration are working on efforts to do just that at the SBA.

However, at the risk of sounding overly sentimental, there’s a certain poetic justice to Warner’s plan that a temporary loosening of rules at the SBA doesn’t have. TARP is a nearly universally-despised program because it symbolizes not only the initial mismanagement that got us into this mess but a fundamental inability to understand what will get us out. Warner’s proposal, in the other hand, does not look to Wall Street for a recovery.

For a relatively small piece of the many billions left in the TARP fund, some of the pallor of ineffectiveness of the bank bailout could be lifted. But more importantly, small businesses, which will surely have some major part in lifting us out of this jobless recovery, can go from being too small to help to being too important to fail.


Originally published at BuzzFlash.com.

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