Economic Stimulus

Additional Economic Stimulus – Another Thought

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Guest Contributor Wayne Nelson

Much is being made of the unwillingness of the financial industry to lend money in this current environment of uncertainty. For those of us who were around during the S&L debacle of the late ‘80’s and early ‘90’s, this comes as no surprise. It became very clear that lessons not learned were destined to be repeated. The major distinctions between then and now were (1) financial institutions were not too big to fail back then, and many did; and (2) there are more financial products that nobody understands out there now than there were back then.

It is clear that lending is still being done by community and small regional financial institutions which have not been as impacted by the market crash and asset devaluation, especially in the area of real estate, as have larger institutions. But these institutions are limited by their size and capital base as to just how much and to whom they might lend. So what’s the answer? Extend additional TARP or similar funds to build up the capital base and increased lending capacity? We’ve tried that and all it’s done is to provide funds for a steady flow of political contributions and allow for fat salaries and bonuses at the upper management and boardroom levels as well as returns to shareholders. None of this contributes to economic recovery nor is it probably intended to do so.

So, where do we go from here? How about the U. S. Small Business Administration (SBA)? This agency is charged with providing support to small business and start-up entities that would otherwise not be bankable in this or any other environment. It does this through some direct financing but mainly through guaranteeing a percentage of any loan, usually 70% – 80%, that a lending institution would otherwise be unwilling to make. This leaves lending institutions with a level of potential loss exposure that they can live with while also allowing for a satisfactory rate of return.

For example, in 1992, after the bulk of the S&L debacle, the Boston District of SBA did a pilot program known as the New England Loan Recovery Act. Under this program loan accounts from failed banks that were now being serviced by FDIC or its authorized representative, were reviewed to determine salvageability. Once the determination was made, a restructuring proposal was put together and shopped to local lenders. The response was most favorable and many a business that might otherwise have gone under was given a second chance. Unfortunately the program did not stay in existence long enough to help all who were reviewed, and some just could not be helped. But it did permit credit to be loosened, and this was its ultimate intention.

The SBA has many programs designed to aid small business and communities it deals with. There are strings attached which certain elements don’t like. For instance there may be salary restrictions or employment requirements. But increasing domestic employment is what we need in order to pull out of the doldrums. SBA programs normally do not call for immediate, if any, government funds outlays, which should appeal to financial conservatives. In addition there are programs that have appeal to the investment community.

The funds made available through these programs will go directly to where they’re needed without any diversion, thus providing economic stimulus. True, such programs can wind up producing unintended negative results. But it would seem that this would do the overall economy more good than seeing the Dow back at 13,000 and listening to billionaire investors whine that stocks are undervalued.

This seems to be worth a try.