With the signing of the Dodd-Frank Act into law last week, the Treasury Department’s authority to tap into the $700 billion Troubled Asset Relief Program (TARP) came to a sudden and largely unheralded end. But at the same time, a bill was progressing through the U.S. Senate that would create a new TARP-like program allowing Treasury to make TARP-like investments in community banks to promote small-business lending.
Democrats have secured the votes of at least two Senate Republicans on the measure, and passage is expected sometime this week. Most opponents (and even some supporters) of the original TARP feared that its passage would inaugurate an era of politicized bank lending, in which Congress and Treasury would use taxpayer money to extend credit to a variety of special-interest groups. The proposed creation of the Small Business Lending Fund confirms those fears.
The new fund would allow Treasury to use $30 billion to purchase preferred stock or other debt instruments from community banks, defined as banks with less than $10 billion in total assets. The bill then directs Treasury to charge the banks a rate of interest (or calculate a dividend) that varies depending on how aggressively they lend out the money: The more aggressively they lend, the less they pay, and vice versa. Supporters of the bill argue that banks could leverage the $30 billion to make up to $300 billion in loans available to small businesses. But, as with any money coming from the government, it comes with many strings attached.
Treasury would require each bank applying for funds to submit a small-business lending plan “describing how the applicant’s business strategy and operating goals will allow it to address the needs of small businesses in the areas it serves, as well as a plan to provide linguistically and culturally appropriate outreach, where appropriate.” The bill specifies that this outreach is to include advertising in print, radio, television, or electronic media targeting minorities, women, and military veterans. Furthermore, the bill instructs Treasury to give priority to banks that serve “small businesses that are minority-, veteran-, and women-owned and that also serve low- and moderate-income, minority, and other underserved or rural communities.”
This is the kind of politicized bank lending that the government has encouraged for decades through laws such as the Community Reinvestment Act and through mandates requiring Fannie Mae and Freddie Mac to promote homeownership in low-income communities. At best, such measures provided a politically palatable justification for irresponsible lending during the housing boom. At worst, they actively drove the deterioration of lending standards that led to the bust.
The case against such measures isn’t based on racism or sexism. It’s based on the idea that banks should make lending decisions based on credit risk, period. We are far beyond the point where discrimination was a big enough problem to justify such measures. Indeed, we are at the point where such measures actively encourage the fraudulent use of minority-owned subsidiaries to obtain federal contracts. Do you think dangling $300 billion in newly available credit out there might lead to fraud on a scale that dwarfs what we’ve seen with regard to federal contracts? I do, too.
More troubling, however, might be what the bill doesn’t say. Congress has built more limits into this program than it did into TARP, but it still leaves broad discretion to the Treasury Department, meaning lots of room for informal “understandings” among community banks about how to enhance their applications and increase their chances of qualifying for large allocations. It is likely that the administration’s friends will be treated well, and its enemies treated poorly. There can be little doubt that community banks will be paying closer attention to the priorities of their representatives in Congress once the bill becomes law.
Supporters of the fund argue that it isn’t as poorly designed as TARP and won’t be put to so many bad and politicized uses. Sen. George LeMieux (Fla.), one of the two Republicans who support the bill, emphasized the contrast between helping community banks make loans to small businesses and bailing out Goldman Sachs. And it is unlikely that Treasury would find a worse use for the capital than the loans it made to GM and Chrysler, which merely postponed those firms’ bankruptcy filings at great cost to the taxpayers. But that is precisely the point: The TARP legislation did not authorize the government to bail out the Detroit automakers, but the Bush administration used a novel interpretation of the law to do it anyway, and the same thing could happen with this law as well. Programs of this nature are bound to be abused.
Ever since President Obama took office, Democrats have been making life difficult for small businesses. Don’t take it from me. Here’s what the National Federation of Independent Business (NFIB), the strongest voice for small business in Washington, had to say about it in a report issued last December: “The ‘turbulence’ created when Congress is in session is often debilitating, this year being one of the worst. Themes including ‘tax more,’ ‘tax the rich even more,’ ‘VAT taxes,’ higher energy costs due to Cap and Trade, mandates and taxes for health care, threats of ‘stimulus II,’ incomprehensible deficits . . . The list goes on and on.”
Now, with the November elections on the horizon, Democrats are trying to buy their way back into the small-business community’s good graces with a TARP-like program that the NFIB doesn’t even support. “Small-business owners are worried about the threat of increased taxes, new health-care mandates, higher energy costs and more regulations from Washington,” the group said in a statement issued the day of the Senate vote. In other words, credit isn’t the problem: Washington is.
The NFIB’s chief economist, William Dunkelberg, was even blunter: “We can create lots of jobs making bad loans,” he said. “We did that during the housing bubble.” Of course, for Democrats, it’s easier to blow another credit-fueled bubble than to create a climate conducive to small-business growth. Low taxes, predictable regulations, and free trade aren’t things Democrats do well. Politicizing the basic functions of our economy, however, is something they do very well. What a Republican administration created in the midst of a crisis, the Democrats now aim to make permanent.
– Stephen Spruiell is an NRO staff reporter.