CATO Institute Still Hates SBA

By Charles H. Green

It’s April and as if programmed by the calendar, the CATO Institute offered its annual diatribe about the U.S. Small Business Administration last week. During this period last year I wrote a column in the Coleman Report about the inflammatory remarks about the SBA by CATO Institute’s Veronique de Rugy … well she’s back.

Some business lenders will recognize the CATO Institute as CATOa libertarian think tank founded in 1974 originally as the Charles Koch Foundation, whose CEO is former BB&T Chairman John Allison. Dr. de Rugy is an adjunct scholar at the institute.

This year, Ms. de Rugy’s narrative in the National Review follows Senator Jeff Sessions (R-AL), whose recent query to the SBA demanded an explanation as the “real cost” of the SBA. It seems that the Senator was following de Rugy’s perennial focus on a narrow list of franchise companies that have suffered extraordinarily high default rates.

Session’s demands to be told what “the real rate of default” is for the 7(a) program and whether certain franchise brands have been excluded from financing eligibility. Once again, Dr. de Rugy repeats portions of her misguided assertions about SBA, which are based on false premises that mislead her conclusions. Repeatedly claiming that SBA guaranteed loan losses impact taxpayers reflects either a stunning lack of program understanding by the distinguished policy researcher or a calloused disregard for facts.

The 7(a) loan guarantee program is by definition, credit insurance. Taxpayers stopped subsidizing this insurance in 2004 (except for temporary budget grants during 2010-2012). Participating borrowers pay a premium of up to 3.75% of their loan amount and lenders contribute a share of their earnings for the life of the loan to cover loan losses.

Following the financial crisis, the federal budget included supplemental funding to stabilize SBA’s budget from extraordinary losses and provide additional funding to assist Main Street business owners – who were not responsible for the crash or recession – with access to fee-free SBA loans for a year. The total costs spread over three years? $1.3 billion.

During the crisis, federal government bailouts to Citicorp totaled $476 billion, Bank of America $336 billion and Morgan Stanley $135 billion. All three banks are among about a dozen that continue to poise a threat to our national economy as a “too big to fail” institution, and are effectively subsidized by investor’s belief that they would be bailed out again.

Why wouldn’t CATO take on this much larger problem and government reach into private enterprise? Why did they fight Dodd-Frank reforms tooth and nail, which were intended to lower the economy’s exposure to problem banks?

If the concerns raised about SBA are based on a sincere question about the value of SBA investments, let’s have it with some real data that reviews capital access, job creation and business growth. If it’s merely ideological sniping, as I believe, Dr. de Rugy is starting to get as old as I Love Lucy reruns, and we’ll all be better entertained by changing channels.

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