Capital markets have developed effective private solutions such as credit scoring to overcome the asymmetry of information between lenders and borrowers. Besides, small businesses with sound business plans and solid prospects should be able to raise debt and equity capital through private means.
When the federal government was bailing out big banks, Wall Street’s corporate America, Fannie and Freddie; one important federal financial program stayed solvent—the Small Business Administration.
The SBA’s primary job is simply to encourage private financial institutions to make small business loans that they might otherwise not do. The SBA accomplishes this by guaranteeing up to 85% of the loan, which reduces the risk to the private lenders. If the loans are repaid, the taxpayers aren’t out any money.
So it is amazing that during the recent great recession that tanked the economy, you didn’t hear cries from the SBA that it was going under. You would think that a program this successful in helping promote small business growth would earn it some respect and even the pledge from Congress to beef up the program. But just the opposite is happening.
There appears to be a well-coordinated effort to strip the SBA of all funding. Two days after the conservative-leaning Rasmussen Report released a most probably-skewed public opinion poll claiming that 58% of the public wants to end the SBA, an opinion editorial calling for the same appeared in free-daily conservative rag The Washington Examiner. The next day the Wall Street Journal reported on both. (This is how the conservative media pushes an issue into the main stream.)
In the op.ed Tad DeHaven, a budget analyst with the libertarian Cato Institute, says that encouraging private financial institutions to make small business loans isn’t necessary.
Obviously Mr. DeHaven has no experience as a small business owner. His idealistic “think tank” views are great for a salaried employee who doesn’t have to worry about his or his employees’ next paychecks.
Yet, there will be plenty of similarly “principled” members of Congress who buy into this dangerous “eyes wide shut” business philosophy and will encourage the budget deficit Supercommittee to axe the SBA.
But as Bob Coleman, editor of the Coleman Report, pointed out last month in a speech at the 2011 Mid America Lender’s Conference in Fort Worth the SBA did not need a bailout and the program resulted in almost $10 billion in loans to Main Street in the 4th quarter of 2010. That is a tale of success, not a reason to terminate.