Small Business Loans Are Risky
The risk in lending to a small business is extremely high – even when those businesses have a solid business plan and are run by owners with lots of experience. We are seeing a clash between small businesses that are looking for capital, large banks that have the capital but don’t want to release it, and finally the government, who is sitting at the top, creating policy, and putting pressure on banks to release money. Yet, it seems that the United States Government does not have a clear direction in which it wants the banking system to go, and is sending conflicting messages to the public.
On the one hand, the government is blaming the banks for the high risk lending that took place, and is trying to set new regulation that will monitor future bank loans so that the economy will not come to the crippling point at which it is today.
On the other hand, the government is also asking the banks to tie themselves more closely to small businesses and to make riskier investments to those who cannot afford to guarantee the loans in any way.
The irony deepens, as the government continues to blame the current economic crisis on corruption in Wall Street and large banking institutions where executives received gross bonuses, and not on the corruption of the government sponsored organizations like The Federal Home Loan Corporation (Fredie Mac) and The Federal National Mortgage Association (Fannie Mae). Yet, Senators receive an annual salary of $174,00 and of the senators who sat in office in 2003, 40 were millionaires. Congressional leaders receive $183,500 annualy, not to mention pensions and other benefits (United States Senate).
It seems silly that rich people in one organization who just happen to be in the business of “public service” are pointing fingers at other rich people who are in the private sector and calling them corrupt and greedy. Obviously, part of the success of our society depends on our ability to keep corruption amongst all organizations low, and we should not overlook that. But the real issue at hand is that the government has not shown the financial institutions a clear direction and path that it will take. Until it does, large banking institutions will continue to divest from the US economy. Once the government sets in new regulations which will protect the lender, the banks will begin lending out money again to riskier applicants.
“Yet, Senators receive an annual salary of $174,00 and of the senators who sat in office in 2003, 40 were millionaires. Congressional leaders receive $183,500 annualy, not to mention pensions and other benefits.”
This isn’t great pay to be the leaders of the free world. It’s ok but try putting kids through college these amounts. Senators work long hard hours and have to be on the job much more than Congressmen. True there are perks but it’s just not a lot of money.
“Once the government sets in new regulations which will protect the lender, the banks will begin lending out money again to riskier applicants.” The truth is that the government tried this in the early 1990′s to keep the riskier borrowers out but then advocacy groups came in and demanded , rightfully so, more available capital for low income and higher risk borrowers. Ultimately we saw the banks lending to individuals who could not afford the financial burden of debt. Risky loans will always be with us. Banks will always s be picky. Under the current conditions, since it is hard to tell in which direction the economy is going, neither banks nor private equity are interested in funding anything other than solid blue chip ventures with big names from industry with proven financial track records. BG
You seem to be following the mantra that all we have to do is let business regulate itself and all will be good. But business always wants it both ways. They want to be free to risk it all but they want to be saved when they get burned. The fact is that government and business are intertwined. Its a delicate balance between laisse- fair and socialism that no one has been able to bridge yet.
Its true that the government was the body that changed the financing laws to allow for the NINJA loans during the end of the Clinton era. The government decided that they wanted more people to own homes and changed the regulations so that banks could loan to less economically viable households. This is part of a trend that has been developing over the last half century with the advent of Freddy Mac and Fanny May. These regulations worked to protect borrowers pretty well for the most part. The mixture of speculation in the real estate market brought on in part by the government’s lessening loan regulations, the bank’s predatory loaning policies and their ability to pass on bad debts unchecked broke the damn. This is a system that worked in concert to create the cacophony that we are witnessing.
This is why I disagree with your bifurcating Government and Business into two totally separate entities. Business and Government are intertwined. There are many reasons for this. One of the reasons for this is that money and power gravitate towards each other. This is because the top policy makers and enforcers were once top earners and once out of office will go back to the top of the food chain in the business world. They create legislation that is supposed to protect the public but then riddle it with loop holes to protect the banks. They set up regulatory agencies that fail to regulate. These agencies are headed by the same people who work in the industries they are trying to regulate. The reason for this is that these positions require expertise of understanding the industry they want to regulate. This is needed because you want to regulate fairly and not unnecessarily incumber business with regulation.
This complex interweaving of interests and organization was always a delicate balance who’s lines were easily blurred. The bank bail out has only exacerbated this problem as government and business have become dangerously intertwined.
I think that president Obama needs to admit that there is a serious problem and work towards creating a new equilibrium. It may win him some points from the electorate to get back money from the banks but my gut tells me that this money will be spent in some other way by the government or will be re-given to the banks in some sort of tax break or another benefits package. So we might be back to the politics as usual but the loser is the American Republic.
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