Thursday, September 16, 2010
This new legislation will give $30 billion dollars to community banks in order for them to offer loans to small businesses. According to the things we've learned in class, gov't has a place in the market when there is a market failure. The three sources of market failure that we have learned are 1) monopoly 2) externality 3) public good. So should this bill be passed into law considering the concepts we have learned about?
This article mentioned 500 community banks that might be receiving this benefit money so there is no issue of monopoly in this case. The loans are excludable so there is no issue of a public good here. When people take out loans from these banks is there an externality involved? What that person does with the money the banks have been lent might create some sort of externality, but the loans given out by the banks offer no externality at all. There is no unintended effect on others from an individual taking out a loan from a community bank. There is an exchange between the bank and the individual because the bank gives the person money and the person taking out the loan signs some sort of agreement saying that they will pay back the money in this amount of time and/or with this amount of interest.
There is no market failure associated with giving out loans, yet the government still feels lead to give out $30 BILLION dollars to make sure that these banks have enough money to give out all the loans that they want. The gov't definitely should NOT be doing this, since there is no evidence that points to a market failure in the savings and loans market.