For a Better Stimulus: Free the Credit Unions

Instead of dishing $30 billion to small banks, Obama should remove the caps on credit union lending for a bigger stimulus, with less government.

There’s no reason for conservatives to get excited about the “small business lending fund” bill that the Senate plans to consider after it returns from recess.  But one amendment under consideration, an easing of the the cap on credit union business lending, deserves consideration both on its own and as a template for bipartisan action to get the economy moving.

Here’s the background: Although the House-passed small business lending bill is certainly well intentioned—plenty of small businesses owners with good ideas are having trouble getting loans--the Obama administration’s idea of offering $30 billion in federal aid to small banks who will, in turn, lend more to private business seems a bit questionable.  If more government intervention of any sort would have produced a strong, sustained recovery, we’d already be in the middle of one. The amendment, proffered by Sen. Mark Udall (D-CO), however, is a lot better than the bill as a whole.

In particular, it revives a proposal that’s been bouncing around for a few years to increase (but not eliminate) the government-imposed cap on lending from credit unions.  Currently, credit unions --non-profit institutions that provide bank-like services to limited groups of members—can’t lend more than 12.25 percent of their assets to businesses. Udall’s amendment would lift that to 27.5 percent and thereby interject billions of dollars of new business credit into the economy.  (The bill should go further: The cap has no good reason for existing at all.) Unlike the Obama administration’s proposal, furthermore, the amendment doesn’t put a single federal dollar at risk. Banks oppose the bill because they don’t want the additional competition. But it’s good for the economy.

And the underlying idea of reducing needless regulations to stimulate the economy ought to receive more consideration from Congress and the executive branch. Some other specific proposals in the bill may be worth considering—granting smaller public companies an exemption from Sarbanes-Oxley's most burdensome audit provisions and making it much easier for small and medium-sized banks to comply with the Community Reinvestment Act—but a lot of actions won’t even require as heavy of a legislative lift.

Congress can revive the excellent but too little used concept of passing “corrections” bills intended to suspend, delay, or change poorly conceived regulations. Such bills should do what Speaker Newt Gingrich promoted when he vigorously pushed the idea in the mid-1990s: undo specific, clearly stupid government actions without modifying the underlying regulations. (That’s also important but, obviously, requires a lot more deliberation than simply making a “correction.”)

If President Obama wants to make good on his promises to streamline the executive branch and run government better, likewise, he could order a bottom-up review of federal regulations with an emphasis on undoing growth-hindering regulations.  George H.W. Bush ordered such a review in 1991 and 1992 and his administration managed to streamline a fair number of antiquated rules in the process.  The action didn’t help Bush get re-elected (it wasn’t exactly campaign commercial material) but it did contribute to the economic recovery that greeted Bill Clinton.

The federal regulatory state is, by almost all accounts, too big and burdensome, particularly for small business. Sen. Udall’s proposal to undo one particularly destructive regulation has a lot of merit.  And it should serve as a template for further action in nearly all fields of regulatory policy.