Banking & Finance

Government Puts More Capital Into Banks: More Failure Of Tickle Down Theory

FedThe large money center banks never planned to take the money they are getting from the government to make loans. The equity investments will be used to shore up capital, which is now old news. Bank executives talked big about improving credit liquidity, but that was a feint all along.

Since Treasury has not attached strings to the capital going to banks, the system for getting money to businesses and consumers may be a year or more from improving.

Now the tier of banks just below the heavyweights like Citigroup (C) and Bank of American (BAC) are getting capital will get $15 billion. According to The Wall Street Journal, “some banks acknowledged that perhaps only a small chunk of the money would be funneled into loans.” Put another way, the purpose of the $700 billion approved by Congress to save the financial system has been perverted once again.

Will the banks all pay for their greed? Perhaps they will. They are not insulated from falling real estate prices and mortgage defaults. These actions do nothing to improve the value of mortgage-backed securities. The evil cycle almost insures that the federal government will have to put more money into the financial firms or add another rescue which deals directly with homeowners.

Either way, the cost of saving the credit system may still explode.

Douglas A. McIntyre