Tuesday, March 17, 2009

Government to Encourage Banks to Lend to Small Businesses

Oh no, not again.

Does anybody remember a time when banks would make loans to individuals or companies because it made business sense? That seems to be a forgotten concept. Isn't one of the major reasons we are in this financial crisis in the first place because the government "urged" or rewarded banks (through Fannie Mae and Freddie Mac guarantees) to provide loans to low to moderate income borrowers. Weren't these the loans that financial institutions were buying on the secondary markets, passing the risk to investors, not the lenders approving the loans.

So imagine my surprise when this story came out.

If we have learned nothing else during the last year or so, it is that lending institutions must adhere to strict lending policies that make financial sense. Any encouragement to relax those policies just puts the banks, of which the US citizens are now proud owners, at risk for another series of loan defaults.

However, there is one significant difference. Home loans are guaranteed by real estate. Sure, the value of those homes has decreased significantly, but even if there was a 50% drop, the bank would still recoup 50-60% of its loan. In business lending, this is very rarely the case, as the write-offs for bad business loans are often even more significant.

"Those who cannot learn from history are doomed to repeat it."

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