About a decade ago, I learned the hard way that banks don’t lend to startups. It’s just not what traditional banks do. Too much risk. The risk associated with startups is to be assessed by venture capital, private equity, etc. It’s why John Tamny says that banks lend to those who don’t need it. This is all straightforward and nothing new, but before the reader is tempted to ditch this article, ask yourself, “If banks don’t extend credit to startups, due to their immense risk, why do they lend to governments?” Instead of answering that question, I’ll argue that lending to governments is not only bad for business; it’s immoral. But first, it’s imperative that I clarify the following.
Governments produce nothing. The money they have is either lent to them and/or taken from the people they allegedly serve. This is why there’s no such thing as a gift from a government; there are only transfers. Because governments generate no revenue, it’s not the government that repays the loan. Again, with governments, there are only transfers, so yes, a government, on paper, is the primary borrower, but the guarantor is the people. Talk about a perverse incentive, as some of those very same people are also the bank’s clients. Therefore, the bank is not evaluating the creditworthiness of the government but of the people whom the government allegedly serves, as it is they who are ultimately on the hook. But is it the citizens’ creditworthiness that’s actually analyzed? This is where the risk really kicks in.
What happens if the citizens of the municipality in question realize that their government was extended credit, not because of its creditworthiness but because of its ability to extract loan repayments from the people they allegedly serve? They won’t just get angry; if they’re livid, they’ll default. Why would a bank take on that kind of risk—a risk that’s borne of political whims, not of real, economic constraints? Furthermore, the bank is incentivized to pressure the government to raise taxes, but if the bank succeeds in that endeavor, the financial position of other clients in that municipality will then be diminished. Is a loan to a government so lucrative that it’s worth jeopardizing other clients, and if it is, will such profitability paper over the impending damage done to the bank’s reputation?
For the sake of argument, let’s say the reader is a bank, and I want a loan. In this hypothetical, not only do I live well beyond my means, I’ve harmed some of your clients. In the extreme, I didn’t just make their life more financially difficult, I’m responsible for them having lost their business, which means they haven’t been able to pay back what you lent them. Would you lend to me? Of course not, but contrary to this being an absurd scenario, it’s what has actually occurred over the past four years. In March of 2020, those in government thought it best to ‘protect’ lives by destroying livelihoods, and banks have lent to governments since. Why? If I forced a bank’s clients out of work and into their home or onto the street, I’d have no chance of ever receiving a loan, but after governments did just that, banks have asked them, “How much would you like?”
It’s no secret that banks lend its deposits, so imagine the outrage a bankrupt business owner felt when he learned that his bank lent his money to the entity that ruined him? And now ponder why any bank would want to be associated with that seething indignation. If it’s considered risky, at best, to do business with a “politically exposed person,” why is it considered good business to lend to an entity that couldn’t possibly be more politically exposed? And what if people are waking up to this reality? I’d think that banks would want nothing to do with a resentment that could ultimately translate into piles of loans shoveled to its division of special assets. When I read this article, I thought that it would terrify any bank executive who read it, as the author explains “why your local government should leave their creditors in the dust.” If they haven’t read it (or this one), I hope they’ll do so soon.
