Disaster Loans for Economic Catastrophes?

Senator John Kerry, Chairman of the Small Business and Entrepreneurship Committee of the U.S. Senate, recently introduced legislation that would treat the current credit crisis as a federal disaster. If passed, this legislation would enable the Small Business Administration to guarantee private low-interest loans to small businesses, along the lines of what is currently done with the SBA disaster loan program. Senator Kerry compared the recent events around the credit crisis to the extension of aid following the September 11th terrorist attacks which, he noted, put $2 billion into local economies. I am extremely skeptical of this proposal; it appears to me to be a sop to dilute criticism of a bail-out of Wall Street by appearing to redistribute aid to other constituents.

Recall exactly what did happen as a consequence of the 9-11 SBA programs: a 2005 Senate review found that many of the loans went to small businesses that did not appear to be harmed by the terrorist attacks. Only 15% of the cases reviewed by the Senator Kerry’s committee showed evidence of disaster-related losses; the remainder had insufficient or questionable documentation. The more egregious cases of small businesses receiving 9-11 disaster loan aid included the now-infamous doughnut franchise in Oregon, a Nevada tanning salon, a liquor store in Georgia and a golf course in Texas. I also note that this “aid” is provided on very different terms to small businesses than the disaster bail-outs routinely extended to large corporations: small business owners are personally liable for their liabilities and must provide personal guarantees. It appears to me as though the Senate Small Business and Entrepreneurship Committee failed to learn the lessons of 9-11 and of other failed disaster relief programs.