RSS Feed MenuRepublicans were right to oppose a new small business lending plan that looks likely to become law soon; but they should have likened it to Fannie Mae and Freddie Mac rather than the Troubled Assets Relief Program (TARP) used to bailout big financial institutions. The bill the Senate passed late last night doesn’t bail anyone out but, if it’s successful (yes, successful), it could impose an enormous liability on the economy by laying the groundwork for a speculative bubble similar to the one Fannie and Freddie created.
To be sure, the bill has a nice façade and good intentions. Many worthy small businesses have bona fide problems getting credit and the new law would help them through a rube-Goldberg like mechanism that will make $30 billion in Treasury funds available to community banks that increase their lending to small businesses. Unlike TARP, furthermore, it isn’t a bailout; safeguards in the bills’ legislative language mean that really troubled small banks don’t qualify.
Since tightened lending standards and decreased home equity have made it harder for small businesses to get loans, the flow of credit to small enterprises will probably increase and small business job creation could accelerate. The Congressional Budget Office, furthermore, predicts that the fund could well produce profits for Treasury in the end.
And that’s the danger. Although the mechanism works differently, the fundamental idea is the same as the one behind Fannie and Freddie: the public sector will encourage more lending of a certain type and send capital towards lending institutions to make it happen. At first, this could work. Certainly, Americans around the country have ideas worthy of $30 billion in new loans. But, if it grows, such a “fund” could end up creating a bubble. Fannie and Freddie evolved from similarly worthy ideas to help more people become homeowners. At first, they helped only people who could afford homeownership but couldn’t get loans. But, in the long term, they helped encourage sloppy lending and a speculative bubble.
None of this is inevitable since the mechanism in the bill does sunset after 10 years. But, if businesses and banks like it (and why shouldn’t they?) and it turns a profit, hardly anybody would oppose extending or enlarging it. In fact, if it produces net profits for Treasury, it could become a “payfor” to cover popular spending or contribute to tax cuts. And the private sector could become dangerously reliant on government for credit.
If Congress really does want to encourage more small business lending it should look elsewhere: a proposal to let credit unions extend their own business lending and unleash capital that’s otherwise dormant (something Sen. Mark Udall tried to add to the bill) and a drastic simplification of the Small Business Administration’s micro-loan program both deserve serious consideration. But the Small Business Lending Fund seems like a bad idea.
dante // Jul 23, 2010 at 7:13 pm
Fannie and Freddie evolved from similarly worthy ideas to help more people become homeowners. At first, they helped only people who could afford homeownership but couldn’t get loans. But, in the long term, they helped encourage sloppy lending and a speculative bubble.
Do we have to go through this EVERY time? No, the real estate bubble was not the fault of Fannie and Freddie. Yes, F&F backed less than 26% of subprime loans in 2006. No, option ARMs, ALT-A loans, and 120% cash-out-refi loans were not F&F inventions. No, the 1977 CRA was not to blame for the meltdown 30 years later. No, banks were not forced to give option ARMs to people with bad credit by the evil Democrats in Congress.
It’s a good program because it’s allowing / forcing banks to lend to small businesses, who are the main employers in this country. The GOP have heralded the supremacy of small businesses, and invoked their name for everything from cutting the estate tax to cutting the highest marginal tax rate to complaining about over regulating and stifling their progress. The GOP is only against it because the Democrats are FOR it…
TerryF98 // Jul 23, 2010 at 9:03 pm
Eli you are a liar, in fact you are a liar three times over as you have repeated the lie that Fanny and Freddie created the bubble that caused the financial meltdown.
Have you no shame sir!
dave2 // Jul 24, 2010 at 5:23 am
This column is bogus!! You say “the mechanism works differently”, which it absolutely does…there is NO bundling of these loans and NO secondary market for them, as in the case of what Fannie and Freddie do, and you state “at first, this could work”, and then go on to say that this “could” create a “bubble”…BUT YOU NEVER SAY HOW OR WHAT KIND OF “BUBBLE” !!!
What….the prices of buying a small business would suddenly sky rocket because they were more “successful” and people were willing to bid them up???
Yes, that can happen…but is a successful business being sold for a higher price a “bubble”???
More often a successful business does NOT get sold…it’s the business that is going down and the owner wants out!
Sorry, but the market for business brokering works MUCH different than speculative house buying!
I say…let’s see some MORE successful businesses out there NOW… that it might create an unproven and unknown “bubble” is the LEAST of our worries right now with 10%+ unemployment!
jorae // Jul 24, 2010 at 6:48 am
“…they helped encourage sloppy lending and a speculative bubble.” per Mr. Lehrer
I think the Banks/Mortgage Companies made the decision to get people in fast and quick. The low down payments that are associated with the ARM were easy to sell and sounded good when the economy was pushing how to make a million by buying and selling a home. People were watching TV commercials on how to flipping homes. Banks were running commercial that were pushing people to take the equity out and go on dream vacation or improve the value by installing a pool. All to get that name on the dotted line. The responsibility is with the bank. No one held a gun to the head of the bankers to sell a product that was none of their responsibility after the person left the building. But a conscious would have come in handy here and at Goldman Sachs.
“I believe that banking institutions are more dangerous to our liberties than standing armies.”….Thomas Jefferson,
balconesfault // Jul 24, 2010 at 7:01 am
dave2 What….the prices of buying a small business would suddenly sky rocket because they were more “successful” and people were willing to bid them up???
Yes, that can happen…but is a successful business being sold for a higher price a “bubble”???
More often a successful business does NOT get sold…it’s the business that is going down and the owner wants out!
Sorry, but the market for business brokering works MUCH different than speculative house buying!
Thanks for saying this, Dave.
The other comments slapping down the Fannie/Freddie canard once more were useful – but this is the gist – the whole premise of Eli’s article is farcical.
msmilack // Jul 24, 2010 at 12:36 pm
Helping small business with lending is perhaps the singularly most important necessary action the government can do to increase jobs, sustain jobs and keep business people from losing everything. The only mistake I see is that it wasn’t done sooner.
Why the GOP would reject this boggles the imagination.
Oldskool // Jul 24, 2010 at 1:37 pm
From the comments posted above it appears the GOP has a credibility problem. They oppose these bills from the getgo and then misrepresent the watered-down version whenever one finally passes.
Last year Tucker Carlson caused a stink when he suggested the GOP should be more concerned with getting their facts straight when he compared Fox’s version of news to how the the NYT reports news. The same sentiments from Mr Frum have caused him plenty of grief which begs the question; why do so many writers here rely on truthiness?
msmilack // Jul 24, 2010 at 2:36 pm
Oldskool
You wrote: “Last year Tucker Carlson caused a stink when he suggested the GOP should be more concerned with getting their facts straight when he compared Fox’s version of news to how the the NYT reports news. The same sentiments from Mr Frum have caused him plenty of grief which begs the question; why do so many writers here rely on truthiness?”
First, Tucker Carlson has blown whatever credibility he ever had with his recent writings ala the school of Andrew Breibart. Second, as Frum has pointed out, the Conservative Movement has no interest in the truth which was proven by their reaction to the Breibart attempt to smear Sherrod and his lies and equivocations after, pretending it was anyone’s fault but his own. No one in charge of policy is listening to the writers who tell the truth. They are treated as exiles.
Bebe99 // Jul 24, 2010 at 9:15 pm
The gop stance against this bill is nonsensical. Small business people will not be fooled by thecomparisons to either TARP or F&F. The money is too critical to the survival of small businesses. The GOP have made winning the next election more important than the well-being of their staunchest group of supporters small business owners and their employees. Small business knows who is helping us right now. It is not the GOP-they are only standing in the way.
Fairy Hardcastle // Jul 26, 2010 at 8:58 am
So how many of you sage people here read every jot and tittle of the bill?
LFC // Jul 26, 2010 at 10:50 am
The bill the Senate passed late last night doesn’t bail anyone out but, if it’s successful (yes, successful), it could impose an enormous liability on the economy by laying the groundwork for a speculative bubble similar to the one Fannie and Freddie created.
The only thing speculative here is the author. I see statements about what the bill will do and what it will be, without a single factual reference or even a link to an in-depth analysis. I guess we’re just supposed to take his word that it has “a rube-Goldberg like mechanism” and also his “ifs” and cause and effect scenarios.
And, as pointed out above, this author now is a repeat offender when it comes to parroting the Fannie / Freddie myth, hence his credibility on all things financial is pretty much in the toilet.
Fairy Hardcastle // Jul 26, 2010 at 11:33 am
LFC, then please by all means, give us some actual text of the bill to disprove what this fellow is saying.
All I see here is a bunch of people displaying “wisdom” when they haven’t even read the bill.
balconesfault // Jul 26, 2010 at 11:54 am
Fairy Hardcastle LFC, then please by all means, give us some actual text of the bill to disprove what this fellow is saying.
Fairy – we are responding to the author’s seeming false dichotomy – that making money more easily available to grow small businesses is the same as pushing money into home loans.
CO Independent // Jul 26, 2010 at 1:25 pm
@Dante & TerryF98:
While no single entity can be pinned as bearing fault for the housing bubble, the CRE, HUD, and FM/FM were major contributors to the crisis. The mechanism was simple: political pressure first from the Clinton administration caused FM/FM to reduce credit standards for conforming loans, particularly in low-income and minority communities, and to expand the amount of capital available for such loans. The Bush administration continued this policy. This is not a partisan issue.
Your statements, while generally accurate, are not particularly insightful or meaningful. The FMs get to define what constitutes a “conforming” mortgage. By extension, this also defines what constitutes a “nonconforming” mortgage, aka a subprime mortgage. When the two FMs lowered the bar to qualify as conforming loans it brought a large swath of what would have been subprime mortgages into the prime market. Then the two FMs
Yes, Wall Street banks and ratings agencies committed blatant fraud in structuring and rating mortgage backed securities, and they should be boiled in oil for doing so. The truth is that the FMs and Wall Street drove massive credit expansion in the mortgage market, which fueled the housing boom and subsequent bust. (It is important to note, however, that the private MBS market did not put public money at risk.)
I have provided a link to the Wikipedia page for Fannie Mae. The contribution of the two FMs to the mortgage bubble is clearly documented in such right-wing propaganda pieces as the New York Times and the Washington Post.
LFC // Jul 26, 2010 at 5:23 pm
balconesfault said… Fairy – we are responding to the author’s seeming false dichotomy – that making money more easily available to grow small businesses is the same as pushing money into home loans.
Balcone, this is a classic case of a know-nothing trying to appear like they have a shred of intelligence. An author puts forth a very clear cause and effect, and Fairy drops back and said “did you read the bill”? He’s so dim that he can’t even grasp that we are discussing what the author, ya’ know, actually WROTE about.
It’s the right-wingnut way. They try to shut down debate with a false argument while demanding that we accept their devoid of facts nonsense as truth.
LFC // Jul 26, 2010 at 5:28 pm
CO Independent, you completely missed the impact of “liar loans”, i.e. fraudulently written mortgages that were 100% from private companies. These were the people who severely ramped up the number of mortgages to feed the derivatives packaging machine. These loans were said to be conforming, but were not. That’s a huge piece of the puzzle to miss.
And the size of Fannie and Freddie’s woes aren’t from what they underwrote, but rather what they bought after the peak to “get in the game”.
Fairy Hardcastle // Jul 26, 2010 at 5:56 pm
How predictable the insults and attacks from people like LFC and others. No interest in actually considering the text of the legislation that is the subject of post — just blithe and blathering statements about how it’s good to force banks to make loans, and that of course this bill is good for small business. Yeah, forcing banks to make loans is just brilliant. But does the bill even do that? Now who’s in fairy land?
CO Independent way to clean their clocks.
CO Independent // Jul 26, 2010 at 6:40 pm
>> CO Independent, you completely missed the impact of “liar loans”, i.e. fraudulently written mortgages that were 100% from private companies. These were the people who severely ramped up the number of mortgages to feed the derivatives packaging machine. These loans were said to be conforming, but were not. That’s a huge piece of the puzzle to miss.
1. I did not miss this piece of the puzzle. See the sentence in my post which states: Yes, Wall Street banks and ratings agencies committed blatant fraud in structuring and rating mortgage backed securities, and they should be boiled in oil for doing so.
2. Having said that, I am unaware of widespread practices in which private mortgage companies fraudulently labeled low-doc and no-doc loans as being “conforming” in the sense that they were an FM-conforming loan. It may well have happened, but I am not aware of it. This would be challenging because a FM “conforming” loan packet must have the supporting documentation in the packet. Low-doc and no-doc loans did not have said documentation, hence dubbing the names “low-doc” and “no-doc.”
3. More common was simple incompetence and outright fraud in by ratings companies in rating the risk of securitized mortgage assets. Yes, Wall Street banks built a machine that allowed private mortgage companies to feed the machine with “liar loans” which were packaged and sold as MBS.
In any event, the original point stands. The CRE, HUD, and the two FMs were significant contributors to blowing the credit bubble.
Rabiner // Jul 26, 2010 at 10:12 pm
CO Independent:
CRE = Council of Reality Experts? I just want to know exactly what you’re referring to.
I still say though that the banks were the largest culprits. A large portion of sub-prime mortgages were to individuals who should of qualified for prime mortgage loans (30-40%) and thus were placed in higher risk loans which were encouraged as a business practice. Banks also colluded with assessors to get housing prices inflated so bank loans would have to be larger than otherwise. Customer information was not verified for loans to be finalized. And credit default swaps allowed Banks to remove liabilities from their books so they could continue giving out loans while still having the required reserves. If anything it was Banks and new financial instruments with the most blame.
CO Independent // Jul 27, 2010 at 12:31 pm
@Rabiner:
CRE was a mistype. I meant to type CRA, for Community Reinvestment Act. I’m used to typing CRE for Commercial Real Estate when writing about the real estate bubble. My bad.
>> I still say though that the banks were the largest culprits.
I’m an empirical kind of guy. I don’t know of any research which has attempted to quantify or apportion the blame between the various players, but would be interested in reading it if you find some.
>>A large portion of sub-prime mortgages were to individuals who should of qualified for prime mortgage loans (30-40%) and thus were placed in higher risk loans which were encouraged as a business practice.
I’m not sure I understand what you mean by this sentence.
>> Banks also colluded with assessors to get housing prices inflated so bank loans would have to be larger than otherwise.
Agreed, but with the caveat that housing prices could not have inflated without the massive expansion of credit available to the housing market. Throughout economic history all asset bubbles have been driven by a credit bubble. The government deliberately allowed the credit bubble to form–in fact they encouraged it.
>> Customer information was not verified for loans to be finalized. And credit default swaps allowed Banks to remove liabilities from their books so they could continue giving out loans while still having the required reserves.
Agreed. This was the securitized market.
>> If anything it was Banks and new financial instruments with the most blame.
Again, I’m an empirical kind of guy. I’ve read extensively about the bubble. I don’t think I could apportion blame between the various players with any degree of confidence. The fairest thing I can say is that numerous and varied parties with political and economic influence had an interest in generating massive credit expansion in the mortgage market, then milking the proceeds. Builders and bankers got rich. Left-leaning Democrats got capital allocated to “underserved” communities in their districts. The Bush administration avoided a certain recession following the bust in the tech boom. Lots of different interests at play, but all united in the common goal of building a bunch of housing that the country did not need and could not afford. This whole experience has given me a new perspective on the practice of building pyramids in ancient Egypt.
You’re a instinctive lefty, Rabiner, but you’re not unreasonable or dogmatic like a lot of the other kooks who occupy these boards, and I like and respect that about you. I think I would enjoy quaffing a brew with you.