The idea addresses the problem, in effect, by going back to Square 1 – the financial crisis and the health of banks.
At a town-hall meeting Tuesday in New Hampshire, Mr. Obama called for congressional approval to invest up to $30 billion in small banks – the ones most likely to make loans to small employers. The money, to be taken by banks that voluntarily opt in, would provide capital as seed money for new loans.
A shortage of capital is just one of the obstacles for the economy's flow of credit. The weak economy means that many banks are wary of lending, and many businesses don't even want to borrow. But more capital could help to revive lending, at least to a modest degree, economists say.
"Jobs will be our No. 1 focus in 2010. And we’re going to start where most new jobs do – with small businesses," Obama said at the event in Nashua, N.H. "Bank lending standards have tightened, and many small businesses are struggling to get loans."
To give banks an incentive to make loans with the money, the Treasury would ask for smaller dividends on the capital from the banks that make the most loans. Dividends would start at a 5 percent annual rate but fall to as low as 1 percent if a participating bank were to expand its lending by 10 percent this year.
The loan plan is one of several job-creation initiatives the president is pursuing. Others include:
• Proposing $33 billion to provide $5,000 tax credits for each new worker that businesses add to their payrolls this year.
• Expanding the loan guarantees provided by the Small Business Administration, as well as eliminating the SBA fees for those small-business loans.
• Cutting capital-gains taxes for investments in small businesses to zero.
• Propping up demand in the economy by investing in infrastructure projects and clean energy and by providing a new round of assistance to cash-strapped states.
The program for community banks, like several other proposals, would need congressional approval.
According to the Obama administration, the $30 billion in bank money would come from funds that larger banks have paid back to the TARP, the Troubled Asset Relief Program launched by the Treasury during the crisis in 2008. The new program would be separate from TARP, to avoid any "bailout" stigma for members of Congress voting on the plan or for banks deciding to participate.
"There will be a very, very different and more positive attitude" in contrast with TARP, said a senior administration official, who spoke on background for reporters before the New Hampshire event.
No policies will help more with job creation, many finance experts say, than ones aimed at restoring a healthy banking system. That's because of the "multiplier" role that banks play, turning $1 of capital into $10 or so of loans.
But these experts are divided over whether Obama has taken the right approach. A year ago, some said he should ask Congress for money to nationalize many failing banks, write off their bad loans, and give the financial system a "fresh start" with clean books.
But the political climate made anything that smacked of more bailout money a tough sell in Congress. The Obama administration opted to pursue a different course, backstopping the largest banks and providing overall support for the economy (a stimulus package) and housing (a foreclosure prevention effort).
Today, the banking system is not collapsing but is also not in strong shape. Most banks show an adequate amount of capital on their books, according to regulatory standards. But the banks remain cautious about lending.
"Banks anticipate significant additional deterioration in the quality" of commercial and residential real estate loans, according to a Federal Reserve survey of banks released Monday.
Still, the Fed survey also showed signs that the worst of banks' credit tightening is past. On balance, terms for loans to large businesses actually eased in the latest quarter. But conditions remain tight for small businesses.
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