I know that most public discourse quickly begins to bounce off the bottom when one or more parties in the conversation oversimplify what are very complex problems. That said, it is with malice of forethought that I suggest that a significant factor in the housing bubble was an over abundance of government backed capital for mom and pop home owner. Who wouldn’t pay too much for a home when you could get zero down, interest-only mortgage? In a democratic society we are afforded the right to act in our own greedy self interest and that is exactly what we did.
So, the Markets collapse under the weight of heinous mismanagement, the pendulum swings the other direction and banks tighten up lending practices. Small business doesn’t have access to the capital required to carry it through the recovery. The proposed remedy to this problem? Provide incentives to banks to lend capital more aggressively. Isn’t this exactly where we got on the merry-go-round? It seems to me that the financial industry has proven incapable of making effective decisions with regards to risk and lending. While they are highly creative in developing new and interesting ways to package and churn debt they’ve shown almost no ability or inclination to more effectively manage the single transaction. Lending policies rely too heavily on computer models of asset valuation. Lending policies rely too heavily on computer models of individual or corporate credit worthiness.
Our company recently spent about 30 days preparing a proposal in response to a Small Business Innovative Research solicitation. The Defense Department and most other government agencies put out wish lists about 6 times a year and invite small business to propose innovative solutions to their problems. Awards are granted to companies that bring innovative ideas to the table that have technical merit and commercial appeal. Prospective participants are encouraged to submit risky innovations along with plans to mitigate the risk. It is a three phase process where performance earns you access to additional capital. Participants that compete for this business year after year are penalized for failing to commercialize their work product.
I would be far more comfortable if the Obama Administration was proposing to spend this $30B through a mechanism like SBIR. Why not expand SBIR to include state, local and non-profit organizations? Why not fund SBIR for the troubled automotive industry? What is unique and highly effective about the SBIR program is that it requires the participant to put together a 25 page proposal to back their request for funds. This process forces the “principal investigator” to spell out in detail what they expect to accomplish and how they plan to accomplish it. Risk is a welcome part of the process but it must be mitigated with appropriate strategies. How different is this from a small business administration loan application?
Much as I feel there is a critical need to do something to jump start the economy, I don’t harbor much hope that tired fiscal policies of the past will serve us very well.