Friday, July 29, 2011

Payback Time for Banks

By John F. Wasik (Reuters)

It’s time for banks to pay back their debt to the rest of us

The deficit dance has been a convenient distraction for big U.S. banks. They’ve not only escaped new taxes for now, but they also are relishing their taxpayer bailout by earning robust profits.

Except for Bank of America, the major U.S. banks are doing just fine, thank you. Yet for all of the abundant generosity and forgiveness of the American people, have banks lent out enough money to Americans to make a difference to the economy at large?

No. Banks are lending less to consumers than they did in 2007, the year before the full-blown financial meltdown, according to recent Federal Reserve Consumer Credit tallies.

Outstanding consumer credit was $2.5 trillion in 2007 compared to $2.4 trillion through May of this year. Revolving credit was down fivemo percent in the first quarter of this year. Total consumer lending was down about $100 billion in 2010 and 2009 alone from 2007 levels.

The net effect was less money flowing to consumers, who are the engine of the U.S. economy. Even if you wanted to build that addition to your home or buy a foreclosed home, good luck getting a large loan from a bank — unless you have perfect credit ratings.

Banks’ bowstring-tight standards for mortgages and home-equity loans triggered the lending squeeze. The Fed’s July 13 Monetary Policy report told the story:

“Mortgage originations trailed off with the end of the refinancing wave that occurred last fall, when interest rates declined … Bank lending through home equity lines also remained extraordinarily weak, reflecting in part tight lending standards amid declines in home prices that cut further into home equity. Both credit card and other consumer loans from banks contracted, on balance, over the first half of the year.”

For taxpayers, the bailout begun in 2008 worked as a mega-banking stimulus unrivaled in history. The largest banks were saved and became bigger. Their trading profits and brokerage operations were protected. Then they were able to pour their taxpayer-enabled profits into lobbying against the needed financial reforms of the Dodd-Frank law. Undaunted, banks are still free to lend out money to credit card holders for 14 percent or more.

In the economy at large, though, layoffs continue, the housing market is still in intensive care and the Federal Reserve’s stimulus plan is a bust.

Despite their soaring profits, megabanks still owe U.S. taxpayers money from the bailout. A new study of released by the Center for Media and Democracy shows that $1.5 trillion of the $4.8 trillion in federal bailout loans are still outstanding.

An even bigger boondoggle is the government’s effective nationalization of the U.S. home mortgage market. Through the purchase of mortgage backed securities and debt from government-seized Fannie Mae and Freddie Mac, the Fed has supported the moribund housing market.

The Obama Administration has yet to put forward a plan to resolve its ownership and continued funding of Fannie and Freddie, two fiscal black holes. Meanwhile, homeowners are still getting foreclosed upon with no end in sight.

“The Federal Reserve and the Treasury have spent $1.6 trillion in a bank-shot to save the housing market by using the same financial companies that got us into this mess,” said Conor Kenny, lead author of the Center study. “That’s more than 800 times what they’ve spent directly to keep homeowners in their houses, and the banks have only made money off the whole thing.”

For American taxpayers, the social return on the bailout has been dismal. Bank foreclosures have resumed their rise. So-called “robo-signing” abuses in home purchases where mortgages are fudged to the benefit of banks also continue. And jobless claims are rising.

It’s time for banks to pay back their debt in a profound way. Yet first, an attitude adjustment is in order: Financial speculation in bank profits should be taxed to pay for education and health care. This trading tax will also reduce the federal deficit over time.

A “Robin Hood” tax like this would even the social capitalism balance sheet. Such a plan is afoot in the U.K. and it should be on the table in any larger discussion

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