G8BigBoom (49.91)

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How To Fix The Banks

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September 02, 2010 – Comments (3)

Should we allow banks to borrow any money from the government at all? Lets say a bank takes a loan from the government at zero percent interest and manages to get that money into a government guaranteed program like fanny, Freddie or one of the many others. It would not matter to them who got a loan since it would always be covered. Could they legally do this? Also if a bank loans out one hundred dollars how much capital must a bank keep on hand in the case of loan default. I would hope over 25% but my guess would be between 5-10%.

Either way the point of this was just to run peoples minds. We all got worked up over government spending yet we provide these banks with an incredible business opportunity (some would call welfare) and all we get are 20% interest loans. Should the government not set a timeline and say in 10 years the government loan window for banks will close and banks will have to go back to selling shares and bonds to raise money? Would this create a more stable economy?

3 Comments – Post Your Own

#1) On September 02, 2010 at 6:49 PM, ChrisGraley (99.70) wrote:

For every $100 that a bank loans out, they are supposed to have $20 in reserves. Now they can get a little bit creative on what those reserves actually are, so your guess is a lot closer than what you hope those reserves are.

Setting a timeline would be a bad idea. The banks would have the comfort of knowing how long that they can milk the system. The threat that we are thinking about closing the window at any time and even better, auditing banks that accepted TARP money and giving the full results to the public, would work much better.

It amazes me how we are so concerned about the bonuses that a bank employee can get and totally ignore how the bank comes up with the cashflow for those bonuses.

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#2) On September 02, 2010 at 7:07 PM, tobernator1000 (< 20) wrote:

I think the Fed needs to acknowledge that handing out free money isn't working, and force the banks to look elsewhere for profit. The Fed argues that keeping rates low will lead to economic growth because that has been true in the past. However, as long as the banks can borrow from the government for almost 0%, then use that money to buy government bonds at more than 3% with zero risk they have no reason to try to make money by lending to the public. If the Fed raises their discount rate (what the banks borrow at), it will force the banks to start lending for profit again, rather than just selling the government their own money back. That will force the banks to compete for our business, which will lower their rates, which will lead to more lending, which is the Fed's goal in the first place.

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#3) On September 02, 2010 at 7:28 PM, rd80 (99.37) wrote:

However, as long as the banks can borrow from the government for almost 0%, then use that money to buy government bonds at more than 3% with zero risk they have no reason to try to make money by lending to the public.

Correct. However, the Fed isn't likely to change it's policy anytime soon since this is one of elements helping to fund the government's deficit spending.

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