Small Business Blog

Remember as a child when you were behaving like the perfect angel that you were and out of nowhere, your mother yelled at you, “You’re driving me crazy! Go outside and play!”?

You weren’t sure what you’d done, but you firmly understood that look and that tone. So, you put down the wrapper of the 14th piece of candy you’d eaten that day (which by the way had no effect on your behavior, and certainly had not caused your hyper activity that was annoying your mother) and walked toward the front door when your father, who was on the way in from doing yard work outside stopped you and asked if your room was clean.

“Noooo” you sigh.

“Then march right down to your room and get it cleaned up.”

“Okaaay” is your response as you turn and head back toward your room. Passing your mother on the way, she grabs the collar on your shirt, spins you around and demands, “Young man, just where do you think you’re headed?”

“To my room. Dad…”

“No sir, Charlie Brown.”, she interrupts. “I said get outside. Now march yourself right back outside. And put that candy down, you’ve had enough today.”

Banks are caught in the same conundrum as we were. They are getting immense pressure right now from two opposing fronts.

Banks have begun announcing to investors the amount of executive bonuses that will be paid out. These are the same banks that received the bail-out money, so our government including Congress, the FDIC and the Whitehouse are trying to figure out a way to control these banks from paying out such high bonuses as are expected to be announced.

According to NPR’s Morning Edition, the FDIC, which regulates the nation’s banks and also insures the money deposited there, is considering raising the insurance premium on banks that make risky decisions.

The thought is that a bank employee who makes a short sighted banking decision that will bring a short term profit to the bank, resulting in a stock increase, which bonuses are tied to, would result in the penalty of raising the bank’s insurance bill.

From the first glance, this makes perfect sense. Bankers aren’t smart enough to have the foresight to control their greed and make slow growth, low risk decisions, so we need our government to step in and additionally regulate our bankers.

After a second glance, you might utter a few words that include the following characters “@$!~**&”. I know I did. Especially after I learned that from 1980 to 2007 spending on regulating finance and banking tripled to over $2 billion. A number that doesn’t include compliance, just regulation, according to Hoover Institution at Stanford University.

Let me explain my reasoning for this sentiment.

Our government places incentives to encourage or discourage actions. For example, if they want you to buy more cars, they create cash for clunkers. If they want you to pay your taxes on time, they create a financial penalty for not complying. Based on the government discouraging risky actions banks, my concern is based on the fact that small business is risky.

We can all cite the statistic that 50 percent of small businesses fail in the first 5 years. Yet our banks, which according to our government are acting too risky and need additional control have, in the last year, drastically decreased their lending.

Tom Zwirlein, PhD, UCCS Professor of Finance and Director of the Southern Colorado Economic Forum, , recently said bank lending has decreased by $600 Billion over the last year.

At the same time, our government is claiming that small business is the key to our economic rebound. If you remember back in November of last year, President Obama signed a bill to give an extra $125 million to extend the SBA’s loan guarantee program. This money was in addition to the $375 million that was already given to the SBA to increase the guarantee from 75 percent to 90 percent on SBA 7a loans, a move to incentivize banks in lending money more freely to small businesses.

I’m sure someone can explain the logic behind penalizing risky moves like lending money to small businesses at the same time that action is being incentivized, but I can’t. Some may call it hypocritical, I call it schizophrenic.

The banks are caught in the middle of Mom telling them to go outside and play by lending money to small businesses, and are given a 90 percent guarantee or even a 100 percent guarantee on these loans, while Dad is commanding that the banks go downstairs to clean their room and tidy things up by not lending money to risky, small businesses or else they will be grounded from their bonuses.

Though it hasn’t gotten to the place where the neighbors are calling DHS to come save the banks from an abusive relationship, I think we all need to take a moment to realize that a recent decline letter on your loan application is not the result of a greedy, heartless banker, but perhaps the result of our government letting their prescription of Thorazine lapse. Hmm, if only our health care problems were fixed maybe they’d be able to afford that prescription…

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