A recent Pew survey revealed the nation’s big banks are drawing the most ire from the American public, and now that the Federal Reserve is poised to hand them another victory, it’s easy to see why Main Street’s anger burns deep.
Wednesday, Federal Reserve Chairman Ben Bernanke released a statement to the House Committee on Financial Services which detailed the accommodative policy the Fed implemented as a result of the Great Recession and outlined its exit strategy from that policy.
The objective of the Fed’s intervention was to alleviate the pressure on the balance sheets of the banks, which would provide them with the financial flexibility necessary to begin lending to consumers and businesses once again. To meet such an end, the Fed increased the size of its balance sheet through purchases of securities and real-estate loans from the banks, and decreased the interest-rate for interbank lending to nearly zero percent.
The banks’ first ‘Win’ came as a result of those sales to the Fed which produced billions of dollars in revenue. Afterwards, many of us were wondering why the banks weren’t lending again, despite raking in record profits, but the answer was simple. They quickly realized they had found themselves with a can’t lose proposition, as they could make guaranteed money instead of taking on more risk from lending to consumers and businesses during a period of economic uncertainty.
How could they do that?
They made the federal government their primary customer and charged them a higher interest rate than the artificially low rate the Fed had set as their cost to borrow. Additionally, they parked more than the federally mandated amount of reserve funds at the Fed, and received interest on those excess amounts.
The banks’ second ‘Win’ will come as a result of Bernanke’s proposed exit strategy, which calls for an increase on the interest rate the banks receive on the aforementioned excess reserves.
Why would the Fed want to do that?
Bernanke has to encourage the banks to keep their money parked at the Fed as opposed to filtering it into the economy through lending to prevent an increase to the money supply that would cause inflation.
So what will the banks do?
They’ll keep raking in the cash.
Their primary customer is poised to spend even more money, and they’ll be right there to lend it to them. Per their standard procedure, they’ll charge them a higher interest rate than their cost to borrow, and because of Bernanke’s incentive, they’ll keep even more money in the Fed’s coffers; the profit-making cycle repeats itself.
The government and Federal Reserve have forged a collective effort to stabilize and stimulate the economy, and in the process, they’ve unintentionally rewarded the banks for not engaging in their principal business and now the Fed is forced to financially incentivize them to continue to not lend to prevent another economic catastrophe.
While Main Street continues to be mired in a long losing streak, the banks remain undefeated at the expense of taxpayers; don’t expect those results from the Pew Survey to change anytime soon.
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