Why Are the Banks Not Lending More?

The Treasury Department reports that October was the ninth consecutive month of declining loans by the 22 top recipients of federal bailout funds. Yet, most of these banks are also reporting significant gains in profits. The vital question is: Why are these banks not lending more?

The answer is White House politicking and old-fashioned banker greed.

The White House realizes that the voting public is furious about the bank bailout. To remove the issue from public view, therefore, the Obama Treasury has pushed the big banks to repay the federal loans before the end of 2009. By year's end, the 22 biggest recipients will have fully repaid their loans to the Treasury ($185 billion), though most will still owe unknown billions to the Federal Reserve System.

The banks are anxious to comply with the Administration's prodding because a total repayment frees them from federal oversight of their salaries and bonuses. Consequently, the same bankers who created the global financial crisis and destroyed millions of jobs are now legally able to take billions of dollars in 2009 as bonuses. Wall Street reportedly has set aside more than $140 billion for this.

Therefore, the arithmetic of the decline in bank loans is that the banks are using $325 billion of what otherwise would be their capital ($185 billion plus $140 billion) to repay the Treasury and to reward their executives.

The harm to the economy and job creation is already enormous. Consider this: the Treasury reports that the average balance of loans made by all these 22 banks in October 2009 was $4.1 trillion, a decline of almost one percent from September. If that $325 billion had been used as capital for loans at a conservative four-to-one reserve, the banks could have easily and safely loaned another $1.3 trillion -- that is, about 30 percent more than they did.

The supposed good news is that the Treasury reports that the total losses in the federal bailout program, called TARP, will "only" be $141 billion (almost exactly equal to the 2009 Wall Street bonuses).

Because of the repayments and bonuses, bank lending in 2010 will continue to be tight. And tight capital means that many potential borrowers will be unable to get the monies they need to expand, unemployment is likely remain at double-digit levels, and the demands for unemployment insurance, Medicaid and other public services will rise even further.

The response of Britain and France to a similar situation is to impose a one-time 50-percent tax on such bonuses. Their political leaders are forcing those who created the financial crisis to pay a significant part of the costs.

A wise policy for the United States would have been to demand that the banks forego any bonuses in 2009 and use the public monies as capital to make solid business loans that will create the millions of new jobs the nation requires. A responsible policy would have continued such demands on Wall Street until national unemployment has dropped to what it was before the crisis -- 4 to 5 percent.

Instead, our leaders have chosen to shift the burdens onto the U.S. public and refuse to regulate Wall Street. It's almost as if Wall Street owns Washington.

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