Main Street

All Taking, No Giving

Under the headline “Banks receiving government aid cut loans” in this morning’s USA Today:

Banks that received federal assistance during the financial crisis reduced lending more aggressively and gave bigger pay raises to employees than institutions that didn’t get aid, a USA TODAY/American University review found.

When the Bush administration’s Treasury Secretary Henry Paulson first demanded the TARP funds from Congress in late 2008, he said they would be used to buy the “troubled assets” on bank balance sheets. But that idea was rather fleeting, replaced quickly with the scheme of simply giving the funds principally to the biggest banks to shore up their capital needs.

Throwing money at the banks with no strings attached — virtually no compensation provisions and no requirements to generate lending — allowed Wall Street to survive, prosper and go right back to business as usual.

Without a robust revival of lending, especially to small- and mid-sized businesses, private sector job growth will continue to be inadequate by any measure. Meanwhile, the biggest Wall Street firms, having benefited from the Bush administration’s bailouts, are again generating mega-profits and mega-bonuses trading all manner of higher-risk instruments.

While the outlines of the Wall Street reform plan taking shape in the Senate are generally strong and sound, whether they will be enough to force a real change in the way the financial sector either helps or hinders Main Street remains to be seen.

That’s why it will be important to watch how the plan might be strengthened. Look in particular for possible amendments from Senators such as Sherrod Brown of Ohio and Ted Kaufman of Delaware that could limit the size and scope of banks. It is possible that Senator Byron Dorgan of North Dakota, who was the Senate’s most outspoken critic of the deregulation of Wall Street in 1999, may offer his own amendments to strengthen the regulatory system. Senator Maria Cantwell of Washington is also said to be considering a revived Glass-Steagall provision to once again separate commercial banks from securities trading and investment banking.

Those are just some of the things that will need to be done to make Wall Street reform potent enough to force at least a greater portion of the financial sector toward doing the job of aiding, instead of undermining, jobs and the economy.

Tags: banks, TARP, Wall Street Reform