I wrote a post last week about a potential small business bubble in the economy if we look to a massive infusion of debt backed by the SBA to jump start entrepreneurial activity in our economy. From that post:
The part of the plan that worries me the most is holding banks accountable for how much small business lending they do each month. The last time the government pushed bad debt on us we ended up with a real estate bubble pumped up in large part by the subprime lending that banks issued due to intense government pressures.
Now add increased fraud and abuse to my worries about this plan from President Obama.
The House Small Business Committee held a hearing yesterday with representatives from the SBA and the Government Accountability Office (GAO) to review the SBA's Historically Underutilized Business Zone or HUBZone program.
The HUBZone program began in 1997 to allow the SBA to issue contracts to small businesses in areas of high-unemployment. The purpose of the program was to increase employment opportunities, economic development in underprivileged areas, and spur investment in areas that have been neglected by economic growth. Sound familiar? This was another attempt to use SBA lending to meet a political objective. I know this sounds like a program just full of good intentions, but in reality these things never seem to work the way that they were supposed to work.
According to the SBA, about $8 billion in contracts were awarded to HUBZone firms in FY 2007. However, the SBA let applicants self-certification for eligibility into the HUBZone program. So guess what happened -- abuses of the program occurred.
In a report released today by the GAO, nineteen firms were wrongly awarded nearly $30 million in federal contracts though the HUBZone program. The firms were misidentified and should have gone to small businesses in low-income neighborhoods.
Congressman Graves from Missouri, Ranking Member of the committee, said after the hearing, "This is the exact same hearing we had last year, how many more times do we need to hold this hearing before the SBA fixes this? This is a prime example of wasting taxpayers' money. If the SBA won't fix this, then the Congress will."
Although I am glad Rep. Graves is letting the light of day shine on this abuse, imagine the mischief that will occur when we turn on a fire hose of SBA loans into the economy as the President has proposed. More fraud, more abuse, more bureaucracy to ride herd over the growing mass of loans, and more Congressional hearings to try and sort it all out.
I have a better plan. Get government out of the way and let entrepreneurs do what they do -- start business that may or may not succeed. And, let's get bankers back to doing what they were supposed to do all along -- only give loans to lower risk businesses that can repay their credit through the cash flow of their businesses.
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