During his State of the Union address last week, President Barack Obama said he wants to "take $30 billion of the money Wall Street banks have repaid and use it to help community banks give small businesses the credit they need to stay afloat."
But even if the money is made available, it may still not get where he wants it to go. Community bankers don't necessarily want it -- and may not really have anyone to lend it to.
The fundamental flaw with Obama's plan, bankers and economists say, is that our current financial problems aren't a function of insufficient supply of money -- they're the result of a lack of demand, particularly from small businesses and consumers.
If that's the case, it's no surprise that expanding credit is not what's needed to jump-start the economy.
"If any supply-side measures make sense at all, these targeted proposals do," Robert Reich, an economist at the University of California at Berkeley and former Labor Secretary under President Bill Clinton, said of Obama's small business proposals, which also include tax credits and tax cuts. "Targeted help to small businesses is useful. But they will not and can not succeed without consumers out there who have money in their pockets," he said in an interview.
According to surveys of bank loan officers by the Federal Reserve consumer and business demand for loans is actually continuing to shrink. Banks and their trade groups report the same thing.
People aren't asking for as many loans as they used to, and since December 2008 the savings rate has been at its highest level in more than a decade. Last week, taxpayer-supported mortgage giant Freddie Mac reported that a record share of homeowners who refinanced their mortgages paid down their principal balance, cutting their overall debt.
With households trying to pay off their debt and saving more of what they earn, they're spending less.
"Without adequate demand, small businesses can't sell their goods and services, and therefore won't hire," Reich said. "Consumers won't have money in their pockets until the government primes the pump adequately through a larger stimulus that gets money out there right away."
Tanya Wheeless, president and CEO of the Arizona Bankers Association, said bankers in her state are reporting that healthy businesses are hunkering down, borrowing less and waiting out the recession.
"Banks make money when they lend it. They have every incentive to do it," Wheeless said. For those businesses unable to secure additional funding, "There's probably a reason why they're not getting it," she said.
The demand for loans, she said, is coming from those small businesses that are in danger of failing. And banks have good reason to be wary. Loans are increasingly being paid late, or not at all. For banks with $1-10 billion in assets -- the kind of banks Obama's plan would target -- the delinquency rate on loans and other assets has more than tripled in just two years, according to data collected by federal bank regulators.
Losses are piling up. As of Sept. 30, banks had written off twice as many loans last year as they had during the same period in 2008, according to the latest federal banking data.
Wheeless added that the banks that need the money -- those that are hurting -- may not qualify for the new funds, considering that bank regulators would only want to funnel the money to healthy banks.
Community banks are generally defined as those with less than $10 billion in assets. Of the nearly 8,100 banks in the U.S., some 8,000 fall into this category. Several hundred are being targeted by regulators for bad practices. Many will fail.
And there's another compelling reason for community banks not to participate in Obama's program: The stigma of TARP, the bank-bailout program that would be the source of the new funds.
Bankers are well aware that last time around, Congress and regulators imposed new restrictions -- including executive compensation limits -- on banks taking TARP funds after they had already taken them.
"Banks that are strong and have existing lending capacity are going to be extremely gun-shy because of what's happened with previous TARP recipients," said Wheeless. "There's a huge stigma associated with it, and frankly I don't know that the government has shown that it can be trusted not to change the rules midway through the game."
John Heasley of the Texas Bankers Association said that his state's banks may not need the money, and probably wouldn't want it even if they did.
"I think you'll find a good number of bankers with some reluctance in taking this money," said Heasley, executive vice president and general counsel for the group. He suggested instead that Obama's plan would be more effective if the money were simply used to increase the already-existing government guarantees on loans backed by the federal Small Business Administration.
As it happens, smaller banks are already doing a much better job of lending to small business than big banks.
While banks with less than $1 billion in assets kept their lending steady in the quarter ending Sept. 30, compared to the previous quarter, the nation's 53 megabanks -- those with more than $100 billion in assets - actually cut their lending nearly 4 percent, or $155 billion, according to an analysis by the Federal Deposit Insurance Corporation.
That three-month decline in lending among the megabanks is more than five times more than the $30 billion Obama would send to small banks, in the best-case scenario.
Some 56 percent of smaller banks increased their lending in the third quarter, while only 23 percent of the megabanks could say the same thing.
Megabanks cut their commercial and industrial lending by nearly 9 percent, the steepest drop of any asset class, according to the FDIC analysis. Smaller banks cut lending in that category by less than 3 percent.
"What you're seeing is local accountability with these community banks," said John W. Ryan, executive vice president of the Conference of State Bank Supervisors. "That, to me, really tells you something. These folks know the customers coming through the door making their case."
Ryan said that community banks examine their customers; big banks examine their balance sheets. He cautioned that this could become more common as big banks grow ever bigger, while small banks are allowed to fail.
"From a community perspective, you worry about that," Ryan said.