[watchandwait]

The self-dealing by the banks since 2008 has been almost wholly underwritten by the Fed and the Treasury. Beyond TARP there are myriad guarantees, lending programs, and regulatory exemptions, all designed to provide the banks with greater profit and allowing them to offload risk, usually to the Fed or the taxpayer. Indeed, if you look closely, much of the "profit" in the banking system today is coming from banks borrowing at Fed subsidized rates and lending that money back to the U.S. government.

[jonnathanson]

This, more or less.

Most of the profit in the banking industry comes from being able to take on massive risk, while simultaneously being cushioned from that risk by the government. Risky positions and derivatives are extremely profitable, but for most people -- those without guaranteed bailouts, or cushy borrowing rates -- the risk is too great. For investment banks, as we've seen, the risk is minimal to nonexistant (or at least the banks seem to function as though it is).

Traditionally, the role of the financial industry was to "provide access to capital," primarily by underwriting, facilitating, and assisting in the execution of large transactions and deals for corporate clients. This role is, ostensibly at least, productive to the overall ("real") economy.

Over the last 30-odd years, and especially over the last decade, the center of profit for the financial industry has shifted away from its traditional role (transactional facilitation), and toward the taking of proprietary positions in various capital markets. It's simply too tempting not to -- as Uncle Sam will lend you your leverage virtually free of charge, and he'll also be there to mop up your mess if you make one.

Imagine being able to gamble at a roulette table with free money, and being given more chips every time your bet busts.

[djm]

I'd like to add that responsibility for banks providing loans backed by the taxpayer ultimately falls on voters. This is what fannie mae/sallie mae etc are all about. Disconnecting access to credit from the ability to repay it inevitably results in loans that will default.

Politicians sold people stuff like fannie mae and people voted for it by electing them. And I guess voting in favour of such things is inevitable when not all voters are taxpayers. An extreme solution might be limiting votes to people who are paying taxes. This seems logical but is obviously politically impossible.

[jonnathanson]

"...I guess voting in favour of such things is inevitable when not all voters are taxpayers."

I get the premise of this logic, i.e., that poor people don't pay taxes and therefore don't care about spending taxpayer dollars. I've seen it presented hundreds of times. But I think, in all honesty, that such a theory is giving the poor too much credit. It assumes that the poor are making conscious decisions based on rational evaluations of their economic incentives. I'm not convinced they think that way. Furthermore, I'm not convinced that they're even informed enough to know what they're doing when they vote on such things.

Some of the blame lies on the voters for voting without understanding, sure. But the politicians -- many of whom are paid for by lobbies -- bear greater responsibility for selling bullshit to underinformed voters, and for coucing the bullshit in emotionally manipulative ways.

[onemoreact]

To back this up, well over 20% of people eligible for food stamps don't apply.

[trunnell]

Almost.

> [programs are] designed to provide the banks with greater profit and allowing them to offload risk

Yes, the Fed is essentially paying the banks to loan money. It's not because the Fed is corrupt, though. It's because that's how bad the economy is.

Normally, banks will happily lend money. But when the risk of default is greater, as it is in a recession, banks are stingy with loans: they only loan to those with better credit-- and at a higher interest rate.

Bank liquidity is so tight right now (yes, it's their own fault) and the economic outlook so dim that if they had their druthers, banks wouldn't lend at all. If that happened, the economy would have an even worse outlook.

Luckily, the Fed can encourage banks to lend by giving them a discount on money (usually around 0.25%). Right now, however, the Fed can't give a discount because the rate is already at 0%. Thus, the present situation of the Fed basically throwing money at the banks, begging them to lend it out to the broader economy.

This is what is known as an edge case.

Don't like it? Join the club. What's happened since 2008 has sickened the remaining responsible, ethical folks managing the economy. But it's not right to impugn the Fed with the actions of a few irresponsible investment banks. If you read Sorkin's account in Too Big to Fail it's plain to see how Paulson and Geithner's actions amounted to making the best of a bad situation. In their case, it's important to distinguish between the appearance of impropriety and actual impropriety.

[Andrew_Quentin]

Why doesn't the Fed just lend this money to ordinary people and businesses directly at 0% interest?

If we are going to have such a system whereby the Fed must print money, which means that the money in the system looses value, then why must the ordinary people or businesses be charged twice by first the lowering in value of the money and second the paying of a higher interest rate, often much higher, to the end bank which lends it?

This system currently concentrates wealth and thus power to the banks. Why, when we probably do not even need them at all and can simply have a massive national bank.

[trunnell]

> Why doesn't the Fed just lend this money to ordinary people and businesses directly at 0% interest?

Good question. Two questions, actually: why doesn't the central bank lend to individuals, and why can't individuals get the same interest rate on loans as a bank.

One reason you and I can't get loans at the prime rate (normally in the 2-5% range) is because we don't have the same creditworthiness as a bank. I don't know about you, but I don't have hundreds of millions of dollars of assets like banks do.

(A decade or two ago, when banking was a more boring and staid business, the creditworthiness of a bank was virtually never in question. In comparison, individuals go bankrupt all time. Granted, there have been periods of banking abuse-- the S&L scandal, the over-leveraging in the 2000s, etc-- and one can rightly criticize the banks in those contexts. In fact, lots of people think that banking should return to the lower-risk model of banking, where banks are more deserving of their credit. But back to your questions.)

Why doesn't the Fed lend to individuals? The Fed's mission is to set fiscal policy. From http://www.federalreserve.gov/pf/pf.htm, "Goals of Monetary Policy":

The goals of monetary policy are spelled out in the Federal Reserve Act, which specifies that the Board of Governors and the Federal Open Market Committee should seek "to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates." Stable prices in the long run are a precondition for maximum sustainable output growth and employment as well as moderate long-term interest rates. When prices are stable and believed likely to remain so, the prices of goods, services, materials, and labor are undistorted by inflation and serve as clearer signals and guides to the efficient allocation of resources and thus contribute to higher standards of living. Moreover, stable prices foster saving and capital formation, because when the risk of erosion of asset values resulting from inflation - and the need to guard against such losses - are minimized, households are encouraged to save more and businesses are encouraged to invest more.

So you see, the intent of this modern economic tool, control of the money supply, is to promote stability while maximizing output. You said:

If we are going to have such a system whereby the Fed must print money, which means that the money in the system looses value...

Actually, printing money doesn't necessarily mean that existing money loses value. The Fed attempts to expand the money supply as the economy grows to maintain the current value of money. If it the money supply were suddenly static while the economy continued to grow, I believe this would result in a deflationary spiral: the first stage is where the expanding value of the whole economy must be denominated by a fixed pool of money, causing the value of that money to increase-- which sounds nice at first. But deflation reduces incentives toward spending and lending, and ultimately curbs growth-- which is bad. So if the size of the economy were fixed, then perhaps a fixed money supply would be desirable. Fortunately, the global economy, in the long term, is growing; so the money supply must grow as well. This reaches the limits of my memory of basic macroeconomics from my B.A. in the late 90s. I'm a programmer; this stuff isn't top of mind, so I'm sure an actual economist could provide better explanations of several of the points above. But I think it's generally accurate.

[gnosis]

"Thus, the present situation of the Fed basically throwing money at the banks, begging them to lend it out to the broader economy."

Why doesn't the government just eliminate the middleman and lend the money out to "the broader economy" themselves?