Reversing the economic downturn requires proactive thinking and direction. The administration has worked toward getting the economy moving again and in executing its vision to reshape our country. However, continuing to implement programs that have proven ineffective is not acceptable. History has clearly shown that government ownership in business does not lead to an unobstructed helping hand, but rather, a program whose only participants will be those that have no other choice.
The Troubled Asset Relief Program was first designed as a way for banks to unload toxic assets into a government-built fund.
However, it morphed into a capital injection program to shore up banks' balance sheets and allow them to continue to lend at a time when confidence in the capital system was at its lowest.
The first round of Tarp was basically force-fed to all the largest institutions. Then came Tarp 2, which gave all community banks the ability to participate.
But then a funny thing happened.
Although the terms seemed relatively reasonable (5% for preferred stock and some warrants) and some banks thought there was no downside to taking this capital, the government started to intrude on how those banks were doing their business — limiting dividend payments, challenging compensation plans and requiring banks to modify existing loans. Banks began to look for ways to repay Tarp funds as quickly as possible just to get out from under the government scrutiny.
More interesting is that lending from the largest Tarp recipients actually decreased, and virtually no correlation was shown to exist between the amount of Tarp injected in banks and any increase in lending.
Equally damaging, some banks that accepted Tarp funds are continuing to default on their dividend payments and may ultimately fail.
This proves the moral hazard that artificially helping an ailing competitor will ultimately hurt the entire system as the strongest players try to compete in an artificial world.
A good example of this is GMAC, which recently changed its name to Ally Bank. It is one of the largest Tarp recipients — 56% owned by the U.S. government — and is one of the highest, if not the highest, deposit rate payers in the country, forcing banks to raise their rates and hurt their bottom lines in order to compete.
Its marketing budget alone likely exceeds that of all community banks combined.
Government-backed loan programs, like the proposed Small Business Lending Fund, could as well be renamed Tarp 3. They will be a hard sell for banks that have learned the lessons of the first two rounds, and the only takers will be banks in the most desperate condition.
Those banks would enter the program and likely husband the capital in order to live to see another day, altering the normal course of business in which poor decisions should lead to mergers, acquisitions or even failures.
If only the weakest participate, then lending will not be stimulated, and the program will not accomplish its intended goals.
Stimulus is, however, a desired step at this time. The administration should look to stimulate those that have a track record in lending and find a way to enhance those that are successful.
A tax holiday for banks that increase their lending would have a positive ripple effect for their business and the consumer. The tax break would provide additional capital by allowing profitable, successful banks to retain additional earnings that can then be leveraged into new loans.
This would certainly create the desired effect of increased lending, which would also increase hiring, and expansion of those banks, without the moral hazard of supporting those that lack a demonstrable business plan for expansion or lending.
To stimulate employment, our government should consider providing startup businesses with a three-year tax holiday and provide the banks that finance them with tax-free status on the interest received on any loans provided.
Small business wins, the economy wins and the government minimizes the prospect of unintended consequences.
