SBA Loans

Much of the current financial crisis can be attributed to banks making mortgage loans to people who could not afford the payments and who did not make substantial down payments. The reason these banks were willing to make these loans, in part, is because they were not obligated to hold those long term debt instruments on their books, rather, through incentivization provided by the government, they could collatoralize those debt obligations and sell them off to other investors.

As long as housing prices continued their upward trends, this scheme seemed to work. After all, if the borrower defaulted on the debt, the house could be reclaimed, sold or refinanced since the price of the house had increased from the time it was purchased.

Well, as more and more people rushed into the housing market under these assumptions, housing prices inflated and a bubble occured. Since, the bubble has popped and housing prices have declined. Investors are now holding long term, complex, and for the time being illiquid assets that have decreased in value in the short term, but do not want to write these assets down. Furthermore, banks holding these assets want to avoid these write downs, as they effect their ratios, which can in turn affect multiple facets of their business including, restricting access to capital, higher lending rates, and others. This has caused a banks to reduce lending, which in turn constricts the economy.

Currently these, and many other, problems are being addressed. However, the populist administration is afraid that by helping these financial institutions that keep this economic machine running, they will be seen by their constituents as bailing out the rich.

Therefore the Obama administration proposes to relax, what I fear are already lax, lending standards for Small Business Loans, as quoted in this article from the LA Times

"the administration is proceeding with plans to eliminate fees for lenders in its two signature small-business lending programs and to increase temporarily the percentage of each SBA loan gauranteed by the government."

http://www.latimes.com/business/la-fi-obama-smallbiz17-2009mar17,0,1842015.story

The increase in percent, if I recall, is upwards of 90%.

Now, after reading the following article

http://finance.yahoo.com/news/Investigators-find-abuse-in-apf-14735795.html

or in the following novel by David Einhorn

http://www.foolingsomepeople.com/main/about-david/bio.html

one might, like myself, be a bit wary of the current SBA loan program. Which oftentimes imitates the so-called "liar loans" issued by the banks, and previously called "toxic assets" and now, for some reason referred to by Treasuery Secretary Timothy Geithner as "legacy assets."

Furthermore, Obama is rasing taxes on individuals making above $250,000. Unless a business is set up as a corporation, the income generated by the business flows through to the individuals tax return. This should have the effect of hurting small businesses, or at least the more successful ones.

Therefore, we arrive to Obama's politics. That is, a redistribution of wealth that punishes the successful by inefficiently, and perhaps recklessly, doling out their earnings captured through higher taxes.