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Potholes Ahead for Main Street

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Congress, the administration, and the Federal Reserve Chairman have repeatedly told us that they are working hard to fix the economy for the American people. They claim that every action they have taken has been done with the best interests of Main Street not Wall Street in mind. Whether their intentions can be believed is questionable. After all, they are politicians. One thing is certain; the short term results of their actions have not benefited Main Street.

As we all know by now, the goal of Washington’s gross intervention in the economy is to unfreeze the credit markets with injections of massive amounts of liquidity. This unfreezing will allow financial institutions to resume regular lending thereby putting us on the road to recovery. In other words, the same device (debt) that got us into this mess will get us out of it. That argument aside, as was reported in this column a couple of weeks ago, the best laid plans of Washington are once again going astray. In that column, I reported that instead of unfreezing the credit markets allowing for a freer flow of capital and lower lending rates, the government’s actions so far have actually resulted in higher mortgage rates and consequently less borrowing. This is a result of more government debt pushing up the yields on Treasury notes which in turn raises mortgage rates. Additionally, because Uncle Sam is guaranteeing bank debt, it is becoming more attractive for investors and creating more competition for his own firms — Fannie and Freddie — when they seek to sell their securities. To compete for investors, the nationalized companies must raise their own yields and then charge borrowers higher rates for mortgages. As a matter of fact, mortgage rates are higher now than they were before the Fannie/Freddie bailout was launched.

Higher mortgage rates are an old problem.  This week two new concerns were raised from Washington over the effectiveness of government measures to fix the economy. It seems that nine Wall Street banks have been asked by Congress to justify billions of dollars in pay and bonuses after they accepted nearly $125 billion of taxpayer funded bailout money. The nine banks include the usual suspects: Bank of America, Bank of New York, Mellon, JPMorgan, Chase & Co., Merrill Lynch & Co., Morgan Stanley, Goldman Sachs Group, and Wells Fargo & Co.

Then there was the revelation from the White House this week that banks receiving taxpayer money were “hoarding” the funds and not making new loans. Apparently, the London Interbank Offered Rate (LIBOR), a key indicator of international lending, remains at elevated levels. Not good. But in all fairness to the banks, at least one of them will not be hoarding their federal largess. It has been reported that the government has approved PNC Financial Services Group Inc. to receive $7.7 billion of taxpayer funds and to use $5.58 billion of it to purchase National City Corporation.  So much for the funds being used to unclog the markets. The root problem is that the government should not be doing what it is doing in the first place. But beyond that, the capital infusion program has very few strings attached to it. It was felt that too many strings would discourage bank participation.  Instead,  too few strings are allowing the banks to take advantage of the taxpayer. The bottom line is that we are giving hundreds of billions if not trillions of dollars of our money to banks that got us into this mess in the first place with virtually no restrictions with the hope that they won’t do it to us again? How stupid or corrupt is that? Here’s hoping that the banks continue to hoard our money.

Beyond the reported ill effects on Main Street of the government’s actions to fix the economy, there are other hidden bad consequences as well. Because the Federal Reserve has decreased interest rates to artificially low levels over the last nine months to stimulate lending (by the way this hasn’t worked either) the earnings of many small community banks have been adversely affected. Many of these banks were responsible and took no part in subprime lending. These institutions are important to millions of Americans on Main Street who rely on them for loans and savings accounts. One of the last things we need is a crisis in the community banking industry. Current government policy is already making it hard for these institutions to succeed.

Lastly, another hidden bad consequence of the government’s actions is a lowering of the yields on money market and savings accounts. Again, as the Fed lowers interest rates artificially, savings and money market rates also decline. Go online or check your next bank statement to see that your savings rate has gone done. With more people on Main Street hurting, especially pensioners and those on fixed incomes, the last thing they need is for their last safe haven to be upended by government policy. But that is what is happening.

We could take Washington at its word that it is doing its best to help Main Street through this crisis. The consequences of its actions speak otherwise. Then again, maybe Washington is doing its best; because when it does its best, we are at our worst.

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About Kenn Jacobine

  • Les Slater

    The problem is not fundamentally liquidity. It is the low likelihood of making a sufficient profit from investments. It doesn’t matter how much capital there is or how cheaply it is to borrow. Even free money is not attractive to capitalists if they stand to lose part of it by investing.

    Unemployment is now rising, or will soon rise, in most countries. It is predicted by many economists that U.S. rate will be between 8 and 8.5% before the end of the year. We already see how this is affecting consumer spending. Consumer, and as a consequence, commercial spending, will continue to drop as unemployment rises.

    At present there is a very strong likelihood that we are headed for a 30’s style depression. There are beginning signs of deflation.

    Economists are hoping, beyond hope, that the Chinese economy will be the motor force to prevent a general worldwide collapse. The problem is that the markets that China sells to are ALL tanking.

  • Les Slater

    Nobody else has commented on this topic to date, however there are those in the financial industry that are beginning to see some of the things I’m talking about.

    In today’s Financial Times, Merrill chief sees severe global slowdown:

    “The global economy is entering a slowdown of epic proportions, comparable to the Great Depression, John Thain, chairman and chief executive of Merrill Lynch, warned on Tuesday.”

  • Francois Breton

    I approve your comments concerning billions dollars bonuses to company that has been helped by money coming from the people. It is probably impossible to recuperate this money. But would there be a way in “inviting” the concerned people in investing the money received in the compagnies. If they have faith in the survival of the compagny it would be just an investement.
    By publicising this, it would be ticklish for them to refuse.

    François Breton

  • bliffle

    Looks like a well-orchestrated looting of the US treasury, setup by the Bush administration as a parting gift to their friends in the financial ‘industry’.

  • bliffle

    The cynical reality of Kenns opening sentence becomes more obvious every day: “Congress, the administration, and the Federal Reserve Chairman have repeatedly told us that they are working hard to fix the economy for the American people.”