Why is the free market rejecting Obama's loan program?

President Obama's new plan to offer loans to community banks and small businesses meets a chorus of refusals.

Add one more voice to the growing chorus arguing that the problems facing small businesses have nothing to do with a lack of credit. This new voice now saying "No" is the free market.

Pallavi Gogoi has written a story reporting on this for the AP. What is interesting is how few of the standard media outlets are picking up on this story. From Freep.com: [Editor's note: The story can also be seen here.]

Bank executives say their customers don't want loans, even at low interest rates, because the sluggish economy has chilled expansion plans. Some say the federal money isn't worth it because they fear it will come with too much regulatory oversight.

"We have taken a strategic decision not to have our primary regulator, the government, also be a partner in our bank," said William Chase Jr., CEO of Triumph Bank in Memphis.

Chase said the bank already has enough capital to meet the paltry demand for loans. "Our business customers are mired in uncertainty and are reluctant to invest in their businesses," Chase said.

The problem has never been a lack of money. The banks have lots of cash right now.

Those small business owners who have survived the recession to this point are being very cautious. Taking on more debt is not a prudent decision for many of them. They worry about the increased debt load on their businesses and what it does to their overhead each month. They are being prudent, which will give them the best chance of making it to the other side of this economic mess, whenever that might occur.

One thing to watch is whether banks are pressured to lend this money out. If they are, and they succumb to this pressure, they will be loaning to many businesses that are bad credit risks. Businesses that can't support the increased credit may be desperate enough to take these loans as a last ditch effort to survive.

But then comes the day of reckoning. The economy is predicted to remain very weak. Many of these businesses that should never have been given loans based on their credit worthiness will fail.

The small business loan bubble will burst. The impact of this failure on an already fragile economy is likely to be dire.

My heart aches every time I hear from a desperate small business owner angry that I am not in favor of the small business bailout. I get it. It is awful to see your dreams collapsing around you. But more debt is not the answer to the challenges you are facing. It will only mask the symptoms of your business troubles for a short time. After that, the failure will be even worse for you and for the country that has backed your bad loan.
I hate tough love, but tough love is what this economy needs right now.

(Thanks to Andy Tabar for passing the AP story along).

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