The Obama administration made easily refutable claims about the economy in a front page Washington Post article that describes a plan to give smaller banks money under more generous conditions. The article presents the claim that smaller banks are not making loans to small businesses because of a lack of capital. If this was true, larger banks, that do have ready access to capital, should be seeing rapid growth in the market share of small business loans (apart from the growth due to mergers). There is no evidence that this is actually the case. This would suggest that the limited volume of lending to small businesses is attributable to the lack of good credit risks, rather than the lack of bank capital. The other misleading statement in the piece is that small businesses account for most employment. While this is true, there is no evidence that larger businesses, with easier access to capital, are currently expanding relative to small businesses. If the economy's problems were attributable to the inability of small businesses to obtain capital, then there should be evidence to support this assertion. The article presents none. In fact, the most obvious explanation of the economy's problems is the loss of demand associated with the collapse of the $8 trillion housing bubble. The falloff in investment and consumption spending is totally consistent with what would be predicted from this massive loss of wealth. The administration is apparently unwilling to either press Congress for the stimulus needed to replace this demand or adopt a strategy of pushing down the dollar to improve the trade balance. Instead it is making unsupported arguments about credit markets that imply that we should be giving more taxpayer dollars to bankers.
--Dean Baker
