Backdoor Bailout for Wall Street, Back of the Hand for Main Street

After nearly a decade of living inside the beltway, not much happens in Washington that surprises me anymore. But I was astounded when I heard the Fed say that it would keep target interest rates at exceptionally low levels until at least the middle of 2013. That’s right—two full years! They actually put a date on it! Unprecedented!

To me, the Fed’s policy is nothing more than a backdoor bailout for the Wall Street mega-institutions and the back of the hand for our nation’s community banks.

Unlike the Wall Street institutions that make their money based on volume and transaction fees, community banks do business the old-fashioned way. They pay their customers interest on their savings, lend those deposits back into their communities to create jobs, and price those deposits and loans at a rate that lets them stay in business.

But with the Fed setting rates at nearly zero percent and slack credit demand, how are community banks supposed to make a viable spread on their funds?

Most community banks are swimming in liquidity. Meanwhile, they’re holding short-term investments (encouraged by their field examiners, by the way) under the assumption that rates would begin to rise within the next year or so. Now they are faced with at least two more years of zero interest in a struggling economy.

The Wall Street money houses are basically getting free money out of this deal that they can arbitrage and hedge worldwide. What about the community banks that are trying to turn this economy around? They are stuck with deposits that cost more than the federal funds rate, slack demand and a 2.15 percent 10-year Treasury.

Once again, Wall Street gets a bailout on the backs of Main Street’s community banks, small businesses and hard-working Americans. It is a slap in the face.

One thought on “Backdoor Bailout for Wall Street, Back of the Hand for Main Street

  1. Cam, from my perspective as a community banker, I am compelled to expand on your comments, but first wish to respond to Mr. Westrom. His basic premise is rather broad in scope, but vague on details. While embracing the advances in electronic banking, community bankers realize that many of our products and services are available from the universe of financial companies across the Internet. However, drawing terminology from Mr. Westrom, most of our customers are “conventional” in their overriding criteria for bank selection, which is a trusted relationship with their lender/personal banker, allowing us to make a respectable margin on our most important revenue source: “conventional” net interest.

    That leads me back to the points I wish to make regarding the Fed’s announcement. The liquidity we “enjoy” is generally from excess short term deposits that build in a low rate, diminished loan demand environment. Customers naturally keep deposit terms short in anticipation of rising rates. Borrowers want to lock-in their rate for the same reason. Now the Fed sets a new precedent by pronouncing continued low rates for another two years. Potential borrowers, currently keeping capital projects on hold and money liquid, are even more inclined to “wait and see” how things play out, in regards to regulatory requirements, tax burden, and the general economy. There’s no uncertainty about the prospect for rising rates, therefore no urgency to start that project that, incidentally, would create jobs. What were they thinking?

    Jim Ashworth
    CNB Bank & Trust
    Carlinville, IL

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