President Obama seems to genuinely want to help people and improve the economy. However, he also seems to genuinely believe that the best and most effective way to accomplish these goals is through government intervention and wealth redistribution. In his State of the Union address, President Barack Obama pinpointed several particular policy-goals, one of which was to stimulate increased lending to small businesses. How does Obama propose to encourage such lending? Someone with a different perspective might look for ways to remove regulatory barriers to increase lending, but President Obama’s plan is to simply shuffle $30 billion in TARP funds to community banks, no doubt with many strings attached.
However, there’s a much simpler way to increase small business lending, one that requires zero taxpayer dollars and presents no risk to the financial system: allow credit unions to increase their lending to small businesses and low-income residents.
Throughout the economic crisis, while banks and other financial institutions withdrew lines of credit and gave questionable bonuses to their executives, credit unions have continued to lend. They could lend even more if not for the regulations that prevent them from doing so.
Like banks, credit unions offer a mix of financial services, including checking and savings accounts (credit unions call them “share accounts”), credit cards, and loans. However, credit unions differ from banks in that they are limited to serving a specific consumer base, known as their “field of membership.” This could be defined as the employees of a company, residents of a defined geographical region, or members of a church.
Credit unions are also more limited than banks on the types of loans they are allowed to write and the rates that they may charge. Additionally, credit unions are non-profit organizations that do not seek to generate a profit and do not pay federal income taxes-any returns earned from member business lending is returned to the members or used for the operation and growth of the credit union.
Credit unions have been fighting for a decade to lift the cap on the amount of lending that they are allowed to engage in. As recently as September 2009, the Credit Union National Association issued a letter to the president asking for him to support a measure in Congress that would life the cap on credit union business lending from 12.25 percent of their assets to 25 percent and that would allow them to include “underserved” areas as part of their field of membership. The bill, the Promoting Lending to America’s Small Businesses Act of 2009 (HR 3380), has been stuck in the House Financial Services Committee since July 2009.
Increasing credit unions’ ability to lend will not solve all of our economic woes-they control only around 6 percent of the country’s total deposits. However, freeing up credit unions to use their capital to stimulate and sustain small businesses can only help, and it will have a significant impact on areas of the country underserved by banks, at no cost to the taxpayer.
If Congress and President Obama are serious about increasing access to credit right away, they should focus less on redistributing taxpayer dollars and more on freeing the institutions that have capital and want to lend to small businesses.