- "Wall Street banks have cut back on small business
lending [by] more than double
- the cutback in overall lending. [Small business] options
just keep disappearing."
-
- - "http://www.youtube.com/watch?v=l6suIQs7Wx0"
Elizabeth Warren, Chair of the TARP Congressional Oversight Panel
-
-
- The Wall Street bailout of 2008 has radically altered
the banking business. The bailout was supposed to keep credit flowing to
Main Street, but it has wound up having the opposite effect. Small and
medium-sized businesses have traditionally been the main engines for increasing
employment, and they need bank credit for their working capital; but today
credit to local businesses has collapsed nearly everywhere.
-
- That's why so many states-the total is now fourteen-are
considering turning to state-owned banks to get local credit flowing again.
-
- The Bailout that Missed Main Street
-
- The credit collapse of September 2008 was triggered by
the speculative activities of giant Wall Street banks. These profligate
banks, which would have gone bankrupt without federal support, have emerged
from the crisis bigger and more powerful than before. The federal government
has supported and subsidized bank consolidation, resulting in the elimination
of more than a thousand community banks by takeover or failure.
-
- "http://www.demos.org/pubs/Demos_State_Banks.pdf"
The five largest banks now hold 40 percent of all deposits and 48 percent
of all bank assets. These banks-Bank of America, Wells Fargo, JPMorgan
Chase, Citigroup, and PNC-currently control more deposits than the next
largest 45 banks combined.
-
- They are big, they are powerful, and they have lost interest
in local lending. In the past three years, the four largest banks have
cut back on small business lending by a full 53 percent. The two banks
that were the largest recipients of TARP funds, Bank of America and Citigroup,
have cut back on local lending by 94 percent and 64 percent, respectively.
-
- Why? In 2010, the six largest bank holding companies
made a combined $75 billion; and of this, "http://www.nytimes.com/2011/05/31/opinion/31nocera.html"
$56 billion was in trading revenues-income from speculating in derivatives,
futures, commodities, and currencies. If the too-big-to-fail banks win
on these bets, they win big and can pocket the proceeds. If they lose,
the federal government can be relied on to bail them out. In those comfortable
circumstances, why lend to risky local businesses that might go bankrupt,
or to homeowners who might default?
-
- Why Banks Aren't Lending Locally
-
- Another perk of the bailout that has put a tourniquet
on local lending involve interest rates. The Federal Reserve dropped the
Fed funds rate (the rate at which banks lend to each other) to an extremely
low 0 to 0.25 percent. It was a very good deal for the big banks-too good
to be wasted on local lending. As Dirk van Dijk, writing for the investor
website Zacks.com, "http://seekingalpha.com/article/201483-translating-the-
- fed-s-latest-policy-statement?source=article_sb_picks"
explained in April 2010:
-
- Keeping short-term rates low should be good for the stock
market, and is particularly helpful to the big banks like Bank of America
(BAC) and JPMorgan (JPM). Their raw material is short-term money, which
is effectively free right now. They can borrow at 0.25% or less, and then
turn around and invest those funds in, say, a 5-year T-note at 2.50%, locking
in an almost risk-free profit of 2.25%.
-
- On big enough sums of money, this can be very profitable,
and will help to recapitalize the banking system (provided they don't drain
capital by paying it out in dividends or frittering it away in outrageous
bonuses to their top executives).
-
- It can be very profitable indeed for the big Wall Street
banks, but the purpose of the near-zero interest rates was supposed to
be to get banks to lend again. Instead, they are, indeed, paying "outrageous
bonuses to their top executives;" using the money to engage in the
same sort of unregulated speculation that nearly brought down the economy
in 2008; buying up smaller banks; or investing this virtually interest-free
money in risk-free government bonds, on which taxpayers are paying 2.5
percent interest (more for longer-term securities).
- Investing in Treasury bills is an attractive alternative
for banks, not just because it provides 2.25% of risk-free profit but because
it requires no capital investment. The amount of capital a bank must hold
against its assets (mainly loans) depends on how risky the assets are.
Treasuries are considered " "http://law.justia.com/cfr/title12/12-5.0.1.1.42.0.83.6.html"
risk-free," so there is NO capital requirement for holding them. Naturally,
banks prefer investing in Treasuries under these circumstances over making
risky loans, against which they must maintain capital reserves of 7%. The
banks can borrow virtually for free and make a nice return at taxpayer
expense without tying up their capital, which can be used instead to speculate
in the market.
-
- And speculation is particularly lucrative at these very
low interest rates. As blogger Philip George "http://www.philipji.com/item/2011-06-17/low-interest-rates-and-the-rentier-class"
explains:
-
- The entities who really benefit from low interest rates
are hedge funds and traders of financial instruments. Typically, they take
advantage of mispricings of securities amounting to a few cents. And how
do they parlay such tiny mispricings into incomes amounting to tens and
hundreds of millions of dollars? By leveraging their equity ten, fifty,
or a hundred times. And of course they can do that only if money is dirt-cheap.
-
- Equally important, this hurts the producers of real goods
and services who are looking for loans. At present the prime rate is around
3.25%. What self-respecting bank would lend at 5% or even 10% and wait
a whole year when they can earn more in just a few weeks by trading in
financial instruments?
-
- Even when banks do deign to use their nearly-interest-free
funds to support loans, they typically do not pass these very low rates
on to borrowers. For example, the Fed funds rate was lowered by 5 percentage
points between August 2007 and December 2008, but during the same period
the "http://themortgagereports.com/2010/01/correlation-fed-funds-rate-30-year-fixed.htmlhttp:/themort
- gagereports.com/2010/01/correlation-fed-funds-rate-30-year-fixed.html"
30 year fixed mortgage rate dropped by less than 1 percent, from 6.75 percent
to only about 6 percent; today it is still at 4.5 percent.
-
- State-owned Banks to the Rescue?
-
- With lending to Main Street still anemic, some states
are taking matters into their own hands and considering legislation that
would put local credit back into the local economy. "http://publicbankinginstitute.org/state-info.htm"
Fourteen states have now initiated legislation for state-owned banks based
on the model of the Bank of North Dakota (BND), which provides liquidity
for local banks and credit lines for local government. North Dakota has
not lost a single bank to insolvency over the last decade.
-
- Other ways in which the BND supports local lending are
detailed in a Demos report by Jason Judd and Heather McGhee titled "
"http://www.demos.org/pubs/Demos_State_Banks.pdf" Banking on
America: How Main Street Partnership Banks Can Improve Local Economies."
They write:
-
- Alone among states, North Dakota had the wherewithal
to keep credit moving to small businesses when they needed it most. BND's
business lending actually grew from 2007 to 2009 (the tightest months of
the credit crisis) by 35 percent. BND accomplished this through participation
loans, in which BND contributes to a community bank's loan, in order to
free up the bank's capital for more lending. Other tools that boost bank
lending power and lower interest rates include purchases of community bank
stock and-together with the state's targeted economic development programs-interest
rate buy-downs. As a result, loan amounts per capita for small banks in
North Dakota are fully 175% higher than the U.S. average in the last five
years, and its banks have stronger loan-to-asset ratios than comparable
states like Wyoming, South Dakota and Montana.
-
- While we wait for the Fed to reform its monetary policy
and for Congress to break up the banking monoliths, we can follow the lead
of North Dakota and set up our own local credit engines. State-owned banks
can not only nurture and protect local lending but can provide cash-strapped
states with new revenues-without raising taxes, slashing services, or selling
off public assets.
-
- First posted by "http://www.yesmagazine.org/new-economy/how-the-bailout-killed-local-
- lending-and-how-some-states-hope-to-bring-it-back"
Yes! Magazine.
-
-
- Ellen Brown is an attorney, author, and president of
the Public Banking Institute, "http://PublicBankingInstitute.org"
http://PublicBankingInstitute.org. In "http://webofdebt.com/"
Web of Debt, her latest of eleven books, she shows how the power to create
money has been usurped from the people, and how we can get it back. Her
websites are "http://webofdebt.com" http://webofdebt.com and
"http://ellenbrown.com" http://ellenbrown.com. For information
on specific state bank legislation, see "http://publicbankinginstitute.org/state-info.htm"
here.
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