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February 2, 2009

Why nationalizing the banks is a crummy idea

Ed Lasky
As pundits and some Democrats advocate the nationalization of banks we have a real world example of how proficient the government is when it loans money.

The Small Business Administration is a government program geared towards helping the growth of small business. Often, the agency loans money to the businesses that it believes are worthy of laons and are likely to pay them back.

Result?

 On Jun 22, 2007, Business Week published the following:

In fiscal year 2008, the SBA will guarantee $28 billion in loans, mainly through its flagship 7(a) loan program. Plenty of evidence indicates, however, that the time has come for Congress to abolish the SBA loan programs. Here are just three reasons.

First, academic literature shows that private capital markets already efficiently allocate loans to small businesses. Banks give credit at the right price to companies that deserve it at that price, including small businesses.

Empirical studies prove that point, too. In 2002, the Federal Reserve Board reported that the demand for small-business financing closely tracked the pattern of debt growth from 1997 to 2002, suggesting a correlation between the demand and supply of financing. Although conditions deteriorated substantially in 2001 and the beginning of 2002, small businesses didn’t find financing conditions onerous and weren’t suddenly having more difficulty obtaining credit during that period.

Second, shutting down the SBA would hardly stop small businesses from getting loans. Only 1% of small businesses receiving loans (long- or short-term) in a given year receive them from the SBA. And while 29% of 7(a) loans go to minority business owners, SBA distributes loans to roughly only 3% of all minority-owned firms. The same trend is true for women-owned firms. In other words, the SBA is largely irrelevant in the capital market. Even the National Federation of Independent Business, the chief small-business lobbying group, agrees. “Our members tend not to rely on SBA loan programs,” Says Andrew Langer, the NFIB’S manager of regulatory policy.

Finally, even though SBA loans tend to flow to riskier borrowers—as its mission intended—it’s unlikely that these businesses promote economic growth. SBA loans go to businesses that conventional providers of financing have rejected. This means these loans go to the enterprises least likely to create stable employment, improve technology, or enhance national productivity. Default rates on SBA loans are roughly 17% as opposed to 1.5% for FDIC-insured bank loans and 4.3% for credit card loans.

It is time to abolish the SBA loan programs.

One can imagine that nationalizing of banks will just worsen the problem that afflicts the housing and finance industry. Politically-favored groups will be the beneficiaries (there are more votes there) - that will be the focus; not growing businesses that will strengthen America and our job market in the long-term. Just as banks and savings and loans were “encouraged” to extend loans to borrowers with poor credit records, so nationalized banks will become piggy banks for Democratic special interest groups.

Of course, we have other records of our government extending loans: loans given to foreign nations as part of foreign aid programs. These loans can be extended directly, by guarantees, through our contributions to the World Bank and the International Monetary Fund. Those billions of dollars in loans are routinely “forgiven” in diplomatic vernacular; in reality, nations default on these loans all the time. Yet, America continues to renew, extend  and add to these loans.

This is what happens when the government takes tax dollars. It is found money with no sense of responsibility regarding how it is loaned or spent.

We have one another example at work. Our own government-whose hundreds of billions in borrowing is threatening our sovereign credit rating (credit default swap rates on US debt are soaring) and leading to higher interest rates due to a perceived risk that lenders will not be paid back-bets that the US government will, in effect, default.

 


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