Guest commentary: The Fed’s Bank-Aid subsidy

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Good morning. This came via email, and I thought it worthy of its own post. Reader Mike Juha argues the Bernanke Fed is subsidizing banks, and banks aren’t passing along the subsidy to consumers.

Bernanke’s Bank-aid subsidy
By Mike Juha

‘The rate reductions by the Fed FOMC are being made into a subsidy by and for the banks. The Fed rate reductions can not help the economy until this changes.

‘Since August 2007, the Fed has reduced rates from 5.25% to 3%. During that same time, bank mortgage loan rates have increased, rather than decreased. For example, a 1 year ARM should bear a rate roughly 1% more than the Fed rate. Today, interest on a 1 year ARM loan is 2.5% more than the Fed rate. The Fed is lending $30 billion every few weeks through its discount window at 3% to the banks. In turn, the banks are lending these Fed funds at 5.5% or more today, versus 5.4% 6 months ago.

‘This makes the recent Fed rate reductions a subsidy program for the banks, rather than an economic stimulus. Such an outcome does not help the economy. Credit is being reduced in cost only at the interbank level. Credit is being increased in cost by the banks at their retail level. As a consequence, the economy is placed in a greater credit squeeze. And, the banks are squealing with joy over gifts of low cost money from the Fed.

‘The Fed is not requiring the borrowing banks to act in concert with its plan. Such a requirement should be prerequisite to qualifying for borrowing from the Fed.’

Thanks, Mike.
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Photo Credit: Fed Chairman Ben Bernanke, by Getty Images via LATimes.com