President Obama faced a remarkable political challenge in his recent State of the Union. Beset on all sides—by populists on the left and right who are highly suspicious of him and all of institutional Washington, by an economy that can produce GDP growth but not jobs, by an increasing consensus that he has failed to connect his legislative priorities to core values since the election—he succeeded in, if nothing else, reminding us of the energy and passion that helped him build a network of committed volunteers, grassroots campaign staff, and small dollar donors. In the speech he offered a litany of new financial policy prescriptions, including one—rolling $30 billion of TARP funds that big banks have already repaid into smaller, local banks—that has not garnered many headlines, but which represents an affirmation of the critical role that our communities play in our economic vibrancy.
The peculiar conditions of the American economy today—a stock market on the rebound even as unemployment remains at disturbingly high levels—are due in no small part to the continued unwillingness of the largest financial institutions to lend to small businesses. As long as he is determined to create new jobs without expanding the federal payroll, President Obama knows he needs a reliable partner in making credit more readily available to the small businesses that utilize it to manage uncertainty and invest in new equipment. He has tried cajoling the big banks into lending more, he has tried threatening the big banks into lending more, but it appears that, with this proposal, he’s gone looking for a new partner.
Small businesses are the economic lifeblood of a prosperous community, and smaller banks play a major role in this. They make their money not by leveraging risk, but by investing in people’s dreams, and, as a result, they have been steady and stable through the crisis. Community banks, while representing only 23 percent of the banking industry by assets, hold a remarkable 67 percent of outstanding loans to small businesses. In 2007 and early 2008, when the big banks were making eye-popping profits by investing in increasingly exotic financial instruments, community banks were providing much needed capital to the locally-owned small businesses that create jobs and sponsor little league teams. In late 2008 and 2009, when the big banks were staving off total collapse only through the injection of huge sums of taxpayer money, community banks were providing much needed capital to the locally-owned small businesses that create jobs and sponsor little league teams. And today, when the big banks are giving out bonuses to top executives that are of a suspiciously similar scale to the bailouts they received, community banks are providing much needed capital to the locally-owned small businesses that create jobs and sponsor little league teams.
To be clear, this proposal is hardly a full-scale repudiation of the big banks. In the scope of the entire TARP program, $30 billion represents less than 10% of expenditures. Nevertheless, a shift in strategy to include banks that make their money when the community is prosperous sends an important message about the future of our economy, and marks a critical return to valuing economic development at the local level.
Read more at The Opportunity Agenda website.