Bad Bank Bail-out and A Better Approach
The federal government has invested $45 billion in Citigroup and guaranteed more than $300 billion of its troubled loans. Answering complaints that bailed-out banks aren’t lending, Citi said Tuesday that it had committed $36.5 billion “to support U.S. consumers, businesses and our communities during these challenging times.” The funds are mainly for home mortgages and purchases of mortgage-backed securities.
In normal times, $45 billion in bank capital might result in 10 times that amount in new loans. Citi described the $36.5 billion as the “first stage” of what it hoped to do.
Put another way, that’s one awfully small money multiplier. The reason its so small is that Citi is going to use the loot to support its past and present spending before it loans money out.
Back in September, I anticipated the problem and laid out what I thought was a better approach. I still think its better. Here it goes again:
Consider the role of banks. Banks essentially store money and act as payment agents for depositors, and they loan out money to borrowers.
Now, consider the role of the Fed. The Fed essentially stores money and acts as a payment agent for the banks, and it loans out money to the banks. Put another way – the banks are just an intermediary between the Fed and public. Put even more simply – the banks are a middle-man. Now, back in the day, it was necessary to have a middle-man, someone who knew the local market, who knew the depositors and knew the borrowers, and understood whether making a given load was a good idea. There’s no way the Fed, say, could do that from Washington.
But today, things are different. First, its clear that the banks have no idea who their depositors are, and much less whether the folks borrowing have any chance at all of paying back what they borrowed. That’s self-evident from the fact we’re even debating whether to bail out much of the industry. Second, in this day and age, what information they do have and use generally comes from third parties. They aren’t any better at buying FICO scores than anyone else would be.
So the question is – how exactly do we benefit from having the banks operating as a middle-man between the rest of us and the Fed? Why not let people deposit their money with the Fed, just like banks do, and let people borrow from the discount window, just like banks (and apparently some non-banks) do? I don’t see the benefits to giving banks rights that people don’t have, but I do see plenty of cost. I see a lot of duplication of services between various banks, and I see huge salaries going to the bank executives for that duplication and for acting as middle-men… and that doesn’t even count the cost of the current bail-out. Note also – salaries at the Fed are much lower. I believe Big Bad Ben Bernanke makes about $200K, a pittance compared to the salaries received by the CEOs of a number of banks recently driven into the ground. And there ain’t no stock options at the Fed either!
So I propose letting the public bank at the Fed, just the same way banks bank at the Fed. I’m not proposing banks be made illegal – if they can find a way to operate without having a getting privileged access to the Fed, wonderful. That’s free enterprise and it should be applauded. But the current system, where banks get privileged access to the Federal Reserve is rather unfair, and its been that way since long before this mess began.