On August 19, 2010, Felix Salmon posted:

“There aren’t many things that the government can do to try to boost the number of jobs in the U.S., but at the top of the list has to be attempts to boost lending to small and medium-sized businesses. . . This morning, a Treasury announcement showed one way that this can and should be done. Treasury’s CDFI Fund has awarded just over $100 million to 180 local financial institutions, including $750,000 to my own credit union. That kind of money, leveraged and lent out to small businesses, can do more for creating jobs than just about any other government program. The CDFI initiative is small beer, however, compared to the Small Business Jobs and Credit Act, which would create a $30 billion fund to be used to encourage small banks to lend to small businesses. Combined with standard bank leverage, that could mean $300 billion in new, job-creating loans.”

Isn’t it odd that people who want the federal government (which cannot go bankrupt) to borrow less, also want the private sector (which is subject to bankruptcy) to borrow more? Mr. Salmon quotes the myth of fractional-reserve banking. It doesn’t exist. A bank’s lending is not limited by its reserves. A bank could have $0 reserves and still lend billions. The federal government lends all banks sufficient money to cover any amount of reserves. Bank lending is limited by capital, not reserves.

Popular wisdom holds that banks are at fault for not lending enough. Nonsense. Rather than trying first to indebt business, the government first should provide business with profits. It does this by buying goods and services, in short, by deficit spending.

Business borrowing is not the first stimulus for business growth. Profits come first; then borrowing. To borrow today in hopes of profits tomorrow, is a dangerous game. It’s exactly what homeowners did and this kind of thinking was the single most important reason for our recession. Small businesses go bankrupt so often, because they borrow without profits to support their borrowing. A loan should leverage profits, not hopes.

Rodger Malcolm Mitchell
http://www.rodgermitchell.com

No nation can tax itself into prosperity