Unclogging The Credit Pipeline

President Obama's latest economic recovery charade is his $30 billion small business loan program.

The lending program is part of a bill that passed the House of Representatives on Thursday and now awaits the president's signature. The legislation contains a mix of tax cuts and credits aimed at helping small businesses. The centerpiece of the bill is an effort to make billions of dollars available to community banks for loans to small businesses.

It seems like a simple effort to unclog a credit pipeline that has been blocked since the financial meltdown two years ago.

There's a fly in the ointment, though.  Hardly anybody wants credit.

Bank executives say their customers don't want loans, even at low interest rates, because the sluggish economy has chilled expansion plans. Some say the federal money isn't worth it because they fear it will come with too much regulatory oversight.

"We have taken a strategic decision not to have our primary regulator, the government, also be a partner in our bank," said William Chase Jr., CEO of Triumph Bank in Memphis.

Chase said the bank already has enough capital to meet the paltry demand for loans. "Our business customers are mired in uncertainty and are reluctant to invest in their businesses," Chase said.

The new federal solution awaits Obama's signature.  It's perfect, as government solutions go.  It addresses a non-existent problem.  There is no clogged credit pipeline, but there won't be much new lending because there is no demand, and there is no demand because of the regulatory disruptions brought about by reform – health care reform, financial reform, TARP. 

Not to worry, though.  Whatever happens the new legislation is already another Obama success story. 

Comments

[jorod]

Gotta buy votes...

[DCE]

Tax credits won't help small businesses either. A tax credit won't motivate businesses to hire anyone. Businesses hire because they have work for those new employees to do and expect them to make enough for the business to pay their wages, benefits, as well as some portion of the operating costs. If adding a new employee will do nothing but move a business from the black into the red, then no amount of tax credits or incentives will induce a business to hire.

Unfortunately the folks in Washington don't seem to understand this basic economic truth.

[James]

Perhaps it should not amaze me as much as it does that people refuse to accept that supply-side economics does not work. We are in this mess because of artificial demand brought about by government regulation. When will this madness end?

[Tom Bowler]

DCE, I think they know tax credits won't have much impact. I'd be willing to bet that they like the idea of a tax credit because it allows them to overstate size of the "tax cut".

James, the madness isn't going to end right away. I hear they're still writing mortgages with no money down, so your artificial demand is still in force. But where do you get the idea that supply side economics doesn't work? How do you explain the rise in tax receipts in years that follow cuts to the highest marginal rates?

[James]

Well Tom, that's what I get for opening my mouth without researching what I'm talking about. Classic. Being the economic newbie I am, I used an opposing definition for the correct idea I wished to convey. Upon further review, I seem to have viewed Say's Law as Keynes viewed it, "supply creates its own demand" regardless the economic tide. I would rather not be seen as a cheerleader for Keynesian policy.

The point I wished to display disgust toward was this current trend of the federal government propping up companies in order for them to produce more goods than the American public care to purchase due to high personal debt while yet facing a seemingly perfect storm of high taxes and ever-increasing, no-end-in-sight, government spending.

I mean, I get it. If the American public isn't going to buy the product from Company A, then it must get monies from somewhere to stay alive and the only clarity the Obama Administration have provided on the matter is their apparent belief that it's their duty to do such instead of allowing the market to give natural response to unwanted goods. However, to my thinking, this only creates a vicious cycle of a flooded market, propped up by the government, and ignored by the citizenry. Meanwhile, this same government increases unemployment spending while in the same breath tout their fictional job creation abilities; not to mention their idea of health care reform. Then, in turn, they cross their fingers the American public will find work, take the bait, spend a little extra to get that tax rebate, and then spend money at Company A to buy up all that increased supply the market does not demand. Do I have that right or am I spinning wheels to the delight of talking heads everywhere?

I thought I could shorten that ideal into a few words, but only served to show my ignorance.

[Tom Bowler]

You've got the idea, James. You give yourself too little credit. Politicians who oppose cutting taxes at the high end of the income scale seem to make this blanket assumption that the immediate revenue loss from the tax cut is perpetuated year after year. Then they add it all up as if they're doing a 5th grade arithmetic problem and come up with some big number which they say is the increase in the deficit over time. Like they've never heard the term "tax shelter".

When artificial barriers to making money are removed, people tend to make more of it, and they invest it, and they are taxed on it. Investment turns into jobs, and jobs mean less government dependency and assistance.

Think of wealth as a created thing. There is a finite amount of it at any given point, but it's not so cut and dried over the long haul. Looking down the road the trend is for there to be more wealth generated when taxes are lower than when higher. And that ultimately translates to higher income tax revenues.