There were many policies and practices that came together to cause the Great Recession of 2008, but certainly the trigger was subprime lending in the housing market. People were getting loans on insane real estate valuations on unsupported income. The housing gold rush of 2000 to 2006 was the Wild West of homebuilding, creating an overhang of inventory that’s with us to this day.
With tighter mortgage lending rules in the wake of the housing market collapse, the US saw a return to what are called “full-doc” loans, where the borrower’s income is fully supported with documentation. Eventually the retail real estate market adapted to the new reality, and returned to its normal state of crazy in California and many other markets.
Unfortunately, that didn’t put the subprime dealers out of the lending game — they just switched to a different line of business. When most people think of subprime loans, the most common example is payday loans. But as payday lenders come under increasing scrutiny from state regulators and the new Consumer Financial Protection Bureau, corporate loan sharks have zeroed in on small business as a new and fertile hunting ground.
Small business lending is exempt from many of the protections afforded to individual consumers and, since the loans may include personal guarantees from the owners and personal property put up as collateral, small business owners can lose both their business and their personal assets.
Small businesses can be easy targets for “alternative” lenders because many are chronically undercapitalized. Seasonal businesses frequently have to endure long periods of income drought, causing the effect of one bad season to drag out over an extended period of time.
Just like the subprime real estate loans of the early 2000s, subprime small business loans are being packaged into securities and sold as investments, with many of the same companies that got us into the last recession putting up the money for the new breed of small business lenders. We’ve been to this rodeo before and it doesn’t end well.
What makes the new small business alternative lenders so insidious is they take direct aim at one of the big drivers of new jobs. While it can be argued whether it’s small businesses, or specifically new small businesses, that drive job growth, it’s fair to say that anything that hurts small business also impacts jobs.
Subprime small business lending is also just another avenue for increasing overall debt. Student loans are an evolving crisis in the making, and consumer debt was up 2.1% from the third quarter. A certain amount of debt is good for the economy, but when debt gets out of control that’s a bad sign. When viewed in that context, the Great Recession of 2008 was barely a speed bump.
What’s for certain is the same type of lending practices are being carried out by the usual suspects who got us into trouble last time. One can rightly ask at times like these if we’ll ever learn.