Tuesday, February 02, 2010

Re: Obama's plan to make more money available for small business loans...

(1) The problem isn't so much a lack of funds to lend as it is a shortage of creditworthy firms who want to borrow money in this sluggish economy. 'Creditworthy' firms (defined as firms profitable enough to pay back the borrowed money from existing profits) only borrow if they think they can use the money in a way that boosts profits beyond the cost of capital... and there aren't a lot of firms right now who are confident in their ability to boost profits.

(2) Obama's plan is to give money and tax breaks to small banks to increase their lending to small businesses... in other words, to make loans they aren't now comfortable making. Assuming these banks have to repay the federal government (but who knows for sure?), they'll use the tax breaks to offset the losses they'll take on these loans (the banks aren't lending now because they don't think they'll get paid back)... in other words, taxpayers will subsidize giveaways to small business.