Can the Small Business Administration play a meaningful role in jumpstarting the sputtering economy?

Jim Leach, a former House Banking Committee chairman believes it can, if banks are given enough incentive to offer loans using the SBA's government-backed guarantee.

Mr. Leach argues that most of the government's response to the financial crisis has been aimed at propping up big banks and big business. Future aid, he wrote in a recent editorial that ran in US Banker's sister publication, American Banker, should target the "thousands of job creators in smaller enterprises across the country" and the banks that lend to them.

Demand for SBA loans has waned of late, but Mr. Leach, an Iowa Republican and co-author of landmark Gramm-Leach-Bliley Act of 1998, says it could pick up markedly if the government offered larger loan guarantees.

He also advocates reducing guarantee fees, or even eliminating them for a year or two.

"It is hard to fathom a stimulus approach that has a greater prospect of energizing economic activity more quickly or efficiently," Mr. Leach wrote.

So far most of the government's efforts to unclog the market for SBA loans has been focused on the investment side. The Fed is trying to get the secondary market moving by offering loans to investors who buy securities backed by SBA loans.

But help for lenders could be on the way. A provision in the House's economic stimulus bill would increase the guarantee on some SBA loans to 95%, while a Senate proposal would temporarily remove the guarantee fees.

Many SBA lenders support both proposals, and with a Democrat now occupying the White House, they are likely to see one, or both, in the final version of the stimulus package.

Conservatives have genereally taken a dim view of the SBA. President Reagan's budget director, David Stockman, famously tried to abolish the agency, once saying it did nothing but "spray a faint mist of subsidized credit into the weakest and most prosaic nooks and crannies" of the economy.

The Bush administration never went that far, but several of its policy decisions were so unpopular with community banks that thousands of them stopped making loans through the SBA's flagship 7(a) program.

President Obama has said little about his vision for the SBA, but he is stumping for the House bill that includes the 95% guarantee. With job creation being his administration's ultimate goal, perhaps that's a good place to start.

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