An Idea Whose Time Has Passed

President Obama today finally put meat on the bones of his plan to provide cheap capital to community banks so they can increase lending to small businesses.

He asked Congress to move $30 billion out of the Troubled Asset Relief Program into a new Small Business Lending Fund. Banks with assets under $10 billion could obtain capital from this fund and use it to make loans to small businesses. The dividends banks would pay for this capital would be based on how much they increase their lending—the greater the increase, the lower the dividend.

Banks that receive this capital would not be subject to the requirements imposed on TARP recipients, such as executive compensation limits and the need to issue stock warrants to the U.S. government. These restrictions, not to mention the perception that TARP recipients are weak banks, stalled the administration's earlier efforts to use TARP funds to boost lending to small businesses. Community banks were chosen for this program because they account for more than 50 percent of all small-business loans.

"These are the small, local banks that work most closely with our small businesses—that provide them their first loan and watch them grow through good times and bad," Obama said this afternoon at a town-hall meeting in Nashua, New Hampshire. "The more loans these banks provide to creditworthy small businesses, the better a deal we'll give them on capital from this fund."

The new fund aims to address the tight market for credit facing small businesses, which are much more dependent on banks for credit than large businesses are.

The problem with the plan is that it depends on action from Congress. That means the fund could be months away from being implemented—if it’s implemented at all. Obama administration officials said they’re leaving the details on how the fund should operate to Congress. You’ll recall how well that strategy worked for health care reform. Members of Congress, especially committee chairs, are going to try to put their own stamp on this proposal.

For example, Senator Chris Dodd, the Connecticut Democrat who chairs the Senate Banking Committee, responded to the president’s announcement by pointing out that he has proposed a temporary lending facility that would make loans directly to small businesses.

Credit unions, meanwhile, are asking, “What about us?” The National Association of Federal Credit Unions complained the president’s proposal ignored them. Credit unions could help more small businesses get more loans if Congress would increase their cap on business lending. So we’ll get another round of the age-old "banks versus credit unions" battle.

The biggest problem with Obama’s proposal, though, is TARP fatigue. Many Americans—and most Republicans in Congress—don’t want to reprogram TARP funds, even for a worthy cause such as easing the credit crunch for small businesses. They want to end the program and use any unspent TARP dollars to bring down the nation’s staggering deficit.

"The winds favor shutting TARP down, not expanding it or morphing it into another funding program," said Karen Kerrigan, president and CEO of the Small Business and Entrepreneurship Council. “President Obama's timing on the proposal is about a year late.”

A year ago, Congress might have gone along with the president’s proposal. At the time, however, administration officials didn’t want to risk opening the TARP door to Congress. Instead, they tried to set up the program themselves, under their existing TARP authority. Community banks, however, wouldn’t touch TARP money. Administration officials have known this for months and months and months. They should have gone to Plan B sooner.