Are The Banksters Going To Turn A Recession Into A Depression?

I'm not an economist. I try reading about the economy so that I can make rational decisions, both fiscally and politically. I read a lot-- online, in newspapers and magazines... books. I also listen to people, not to TV talking heads who know less than I do and blather for ratings but to real people who run restaurants and work in various industries and to people working for banking houses and to people being evicted from their homes by banking houses.

A couple weeks ago an old colleague told me he had sold his home for $2.6 million. The buyer was putting down 30% in cash-- $780,000. That's a nice downpayment. Probably means the buyer has got it together in the money field, right? And he does. He has a great, high paying job and is as qualified for a loan as anyone you will ever find. Go tell it to the bank that he asked to finance the mortgage. They turned him down. Banks that were luring in unsuspecting day laborers two years ago with promises that they could buy a house with 5% down and that the value would just keep increasing are now refusing to loan money to blue chip customers. (Point: banksters haven't just cut off bad credit risks in the mortgage market and hedge fund speculators and gamblers, but also legitimate would-be borrowers.)

Another friend is buying a new home for cash. It sold for over half a million dollars a couple years ago but because banks are now unwilling to finance a mortgages, my friend is getting it for less than half that. The banksters are in the way of a healthy credit market and in the way of a recovering economy. Leave them alone and let them do whatever they want, as the Republican members of Congress insist? Well, what about the $700 billion in taxpayer money that was given to them? Why was it given to them? Because we like them? Because we think they should get $100 million bonuses based on their colossal records of failure? No, we were told we couldn't give the money to distressed homeowners or to the unemployed but that if we gave it to the banksters they would start lending again, stimulate the economy, and everything would be ok. They haven't and the financial crisis has deteriorated... significantly.

As we saw last week when Texas right-wing extremist Jeb Hensarling offered an amendment to the TARP legislation meant to prevent Obama's Treasury Secretary from delegating an observer to attend meetings of the board of directors of institutions that take TARP money, 148 Republicans agreed with him that the government shouldn't interfere with the banksters. (25 Republicans, willing to put the nation's fiscal health before their party's failed dogma, crossed the aisle and voted with the Democrats. I should also point out that a pair of reactionary Democrats, Walt Minnick of Idaho and vile Blue Dog Brad Ellsworth of Indiana did what they love most-- voted with the GOP.)

Congress approved the $700 billion rescue plan with the idea that banks would help struggling borrowers and increase lending to stimulate the economy, and many lawmakers want to know how the first half of that money has been spent before approving the second half. But many banks that have received bailout money so far are reluctant to lend, worrying that if new loans go bad, they will be in worse shape if the economy deteriorates.

Indeed, as mounting losses at major banks like Citigroup [whose disgraced CEO, Charlie Prince, was given one of those nice $100 million bonuses when he was ushered out the door for wrecking the company] and Bank of America in the last week have underscored, regulators are still searching for ways to stabilize the banking system. The Obama administration could be forced early on to come up with a systemic solution, getting bad loans off balance sheets as a way to encourage banks to begin lending, which most economists say is essential to get businesses and consumers spending again.

Individually, banks that received some of the first $350 billion from the Treasury’s Troubled Asset Relief Program, or TARP, have offered few public details about how they plan to spend the money, and they are not required to disclose what they do with it. But in conversations behind closed doors with investment analysts, some bankers have been candid about their intentions.

Most of the banks that received the money are far smaller than behemoths like Citigroup or Bank of America. A review of investor presentations and conference calls by executives of some two dozen banks around the country found that few cited lending as a priority. An overwhelming majority saw the bailout program as a no-strings-attached windfall that could be used to pay down debt, acquire other businesses or invest for the future.

Speaking at the FBR Capital Markets conference in New York in December, Walter M. Pressey, president of Boston Private Wealth Management, a healthy bank with a mostly affluent clientele, said there were no immediate plans to do much with the $154 million it received from the Treasury.

“With that capital in hand, not only do we feel comfortable that we can ride out the recession,” he said, “but we also feel that we’ll be in a position to take advantage of opportunities that present themselves once this recession is sorted out.”

The bankers’ comments, while representing only a random sampling of the more than 200 financial institutions that have received TARP money so far, underscore a growing gulf between public expectations for how the $700 billion should be used and the decisions being made by many of the institutions that have taken part. The program does not dictate what banks should do with the money.

The loose requirements in the original plan have contributed to confusion over what the Treasury intended when it abruptly shelved its first proposal-- to buy up bad mortgages-- in favor of making direct investments in individual banks in return for preferred shares of stock.

The Treasury secretary, Henry M. Paulson Jr., said in October that banks should “deploy, not hoard” the money to build confidence and increase lending. He added: “We expect all participating banks to continue to strengthen their efforts to help struggling homeowners who can afford their homes avoid foreclosure.”

But a Congressional oversight panel reported on Jan. 9 that it found no evidence the bailout program had been used to prevent foreclosures, raising questions about whether the Treasury has complied with the law’s requirement that it develop a “plan that seeks to maximize assistance for homeowners.”

The report concluded that the Treasury’s top priority seemed to be to “stabilize financial markets” by simply giving healthy banks more money and letting them decide how best to use it. The report also said it was not clear how giving billions to banks “advances both the goal of financial stability and the well-being of taxpayers, including homeowners threatened by foreclosure, people losing their jobs, and families unable to pay their credit cards.”

This morning on This Week with George Stephanopoulos David Axelrod claimed that the Obama Administration plans to "send a strong message" to the banksters to get credit flowing again. "We don’t want them to sit on any taxpayer money." We haven't seen Obama stand his ground on one contentious issue yet. This would be a good one to start with, although with Republicans playing games with the confirmation of his Treasury Secretary, Tim Geithner, who knows what kinds of foul compromises at the American peoples' expense will have to be made.