Obama prescribes new lending to boost small business

It sounds reasonable: Provide more capital to small community banks so that they will be inclined to lend to small businesses who will then expand and add jobs.

That’s the logic behind the $30 billion plan President Obama floated in New Hampshire Tuesday.

But just one problem: The federal government already tried it and botched it with the $700 billion Troubled Asset Relief Program. You know it as the program that sunk billions into Citigroup, Bank of America and other big banks as well as AIG, General Motors and Chrysler.

At first, the Bush financial crisis squad had hung a “welcome” sign on the TARP, seeking banking’s capital poor and those huddled institutions yearning to lend again.

But quickly, many of the 707 banks that accepted TARP capital became a target for public and political criticism, viewed as needing a bailout. Congress changed some of the rules after the fact, including limiting compensation of TARP recipients.

Those changes scared off small and community banks from participating in TARP, said Camden Fine, president of the Independent Community Bankers of America. In fact, 600 banks that had submitted applications to the Treasury Department pulled them in early 2009, he said.

The bottom line: Did the effort increase small business lending? Not according to the Special Inspector General for TARP.

“Despite the fact that the explicit goal of the Capital Purchase Program was to increase financing to U.S. businesses and consumers, lending continues to decrease, month after month,” states its most recent report.

The latest Federal Reserve Beige Book contains anecdotal reports that loan demand remained weak and declined in many areas of the country. Credit quality is deteriorating and commercial loan delinquencies are on the rise.

For many businesses, lack of credit is not their most pressing challenge. The National Federation of Independent Business’ most recent survey of small-business owners asked what was the single most important problem facing them in December. It was poor sales, followed by taxes, not access to credit.

Still, the Treasury Department clearly believes that creating a new program focused only on community banks with less than $10 billion in assets will succeed where TARP failed.

What’s to prevent a backlash from happening again? “Simply because this program [TARP] became so deeply stigmatized does not mean one designed for community banks will be,” said Gene Sperling, counselor to the Treasury Secretary.

Sperling contended that the American public draws “a big distinction” between the big banks at the heart of the financial crisis and the community banks on Main Street who engage in “long-term relationship lending.”

I’ll agree with that, but will new lending fix the economy or will a better economy fix lending?

Both Fine’s trade group and the American Bankers Association support the intent of Obama’s small-business lending initiative. But given that it’s up to Congress to make it all happen, the details are what matters.

“It may start off as a horse and turn into a platypus,” Fine said.