A $787 billion federal stimulus package sounds like a great idea to inject some life back into a slumping economy. The problem occurs when the banks the money is given to don’t want to use the money to issue loans to small businesses. Even when the federal government then offers to guarantee the loans up to 100% through the Small Business Administration, the banks sit tight. Meanwhile, small businesses are going out of business, or being sold, in droves because they cannot get loans.
Yes, it makes sense to issue loans to the customers with the best risk. But the banks are doing so at the expense of completely ignoring customers with good risk. Even if the risk on a loan is not ideal, a federal guarantee on the loan should make it more appealing. Small businesses make up the majority of the US economy. If the banks help small businesses keep operating, that will send ripples throughout the economy.