Support New Credit Union Regs Despite Barney Frank

More often than not, Rep. Barney Frank can be found fighting for a more expansive state role in the economy. This time though, Frank is rightly backing a credit union deregulation bill - opposed by many Republicans.

House of Representatives Financial Services Committee Chair Barney Frank is smart, funny, liberal, and, more often than not, delighted to fight for a more expansive state role in mangling the economy.  When Frank and others from the port side of the Democratic Party support financial deregulation measures one would expect Republicans and free-market-oriented Democrats to take notice and try to work with him. A recent debate over a business lending measure, however, makes it clear that many Republicans put other values above the free market.

The measure, the felicitously named “Promoting Lending to America’s Small Business Act” is a modest proposal that would make it easier for credit unions (highly regulated, member-controlled, non-profit lending institutions) to lend money to businesses that belong to them. Currently, credit unions can’t lend more than 12.25 percent of their assets to commercial enterprises. Raising this cap to 25 percent, as the legislation would do, could free up about $25 billion more in business lending capital.  Given that a lack of credit for businesses is one of the major things holding back job creation—stricter lending guidelines and a sharp decline in the value of real estate used as collateral for most loans make it difficult for banks to lend—this could help get the economy moving. The Council of Economic advisors job creation metrics lead to the conclusion that over 100,000 new jobs would be created as a result. And, because the money would all come from private sources, taxpayers wouldn’t have to spend a dime. In fact, the increase in business activity would likely serve to raise tax revenue.  In short, it seems like something that should sail through Congress.

And the proposal, indeed, has support on both sides of the aisle--Rep. Ed Royce (R-CA) is one of its lead co-sponsors and moderately well known Republicans like Ron Paul (R-TX) and Dana Rohrabacher (R-CA)  are also on the bill--but enthusiasm for it is clearly a lot stronger on the Democratic side than the Republican one.

The general Republican opposition to the bill stems from the banks’ dislike of it.  Banks are big business and, for obvious reasons, traditionally a Republican constituency. Quite simply, credit unions are banks’ competitors and having them compete more vigorously for business clients would displace some bank lending and squeeze profit margins on the rest.  (Although, since a huge proportion of credit union business loans fund very specialized business needs like the purchase of taxi cab medallions and the operations of organic farms, much of the credit would end up in places where banks don’t land.)  Banks, through their trade group the American Bankers Association, also point out that only a handful of credit unions are now up against the cap. This is true but only because the cap itself and the very strict oversight to which credit unions are subject makes it uneconomical for them to achieve the economies of scale needed to expand business lending.

Nobody says or believes that expanding credit union business lending would or could solve America’s business credit problems. But making it easier would inject billions of dollars into the American economy at no cost to taxpayers.  Republicans wanting to prove their free market bona fides need to get on board and support credit union deregulation.