We had a parade of bank executives meet with the House Committee on Financial Services. Each one had a set of prepared remarks that described how their banks were lending money and how they are trying to use the money that the U.S. Treasury gave them wisely.
There is no doubt that these bankers are lending money. That is not the problem. The problem is the rate at which they are lending this money. The Federal Reserve has lowered the "prime rate" to 3.25%. The prime rate is the rate at which corporations with the best credit can borrow. So this money should have been lent out at 3.25%, or 1% higher, at 4.25%.
Here is a fictitious exchange between our common sense committee member and one of the bankers. Committee member: "Do you know what the prime rate is?" Banker: 'Why, yes, its 3.25%." Committee member: "And at what rate were your loans made?" Banker: "My guess is about 8%." Committee member: "I think we have a problem, don't you?"
This is the real problem. Banks have been given money, but are lending it out at high rates. This money was given to them so the interest they are making on these loans is all profit, but they refuse to lend money at rates consistent with the prime rate. The Fed lowered interest rates to near zero so that banks could in turn lend it out at low rates, but this is not happening and the banks are still charging interest way above the prime rate.
Let's take an example using the rule of 72s (the rule of 72s says that if you take the number 72 and divide it by the rate of interest, you will get how many years it takes to double your money.) Assume that you are a bank and the government "gives" you $50 billion dollars and you, in turn, lend it out at 8%. Using the rule of 72s, the bank will double its money to $100 billion dollars in nine years. However, if the bank were to lend out the money at 4%, it would take 18 years to double its money. This is what happened with the TARP money -- banks were given a free ride to cover their losses -- and all of this was done with taxpayer money.
Until we get the banks to cooperate and lower their interest rates, all of this posturing is just a nice side show.
How would you like to get free money and be able to lend it out and collect all the interest?
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Reader Comments (Page 1 of 1)
2-12-2009 @ 1:30PM
David W. Huston said...
Why is it unsurprising that the bankers are scamming Congress and taxpayers when they report all of the lending they are generating? Again, Congress needs to establish US Banks, funded and regulated through the FED, whose mission is to extend credit for all manner of loans at reasonable rates to Main Street. Let the bad bankers work out their woes through Chapter 11 and let the credit default swappers sue one another, last person standing wins.
3-11-2009 @ 2:29PM
ttttt said...
Here's a little secret you won't hear anyone ever mention....All this "free" money from the government actually cost banks about 6.45%, after tax or about 8% pretax. Last time I checked, an 8% loan wasn't "free." The real problem is how do banks pay back an 8% government loan if they only earn 3.25% from their customers. That's a net loss of 4.75%. And you wonder why they want to return the "free" TARP money!
This article is so factually wrong it isn't even worth reading and should be deleted.