The headline last Tuesday, "Regulators proposing stricter rule for big 8 banks," makes us think that federal bank regulators are doing a great job, policing and controlling our "too big to fail" banks. According to the article, bank regulators "are expected to propose Tuesday that banks increase their ratio of equity to loans and other assets from 3 percent to 5 or 6 percent." How will this affect us here in Fairfield? The answer is simple, this won't affect anybody, anywhere. Will these stiffer requirements curtail bank loans and adversely affect our economy? No.
The U.S bank equity to loan ratio has traditionally been 10%, but that all changed under Republican President George W. Bush. In 2004, the bank equity requirement for mortgage loans was reduced to 5%, and down to 2% for mortgages backed by Fannie Mae or Freddie Mac. That was bad, but the larger problem occurred when bankers started selling homes to less qualified individuals, bundled their lousy home loans into enormous packages, slapped phony-baloney AAA-ratings on them, and then sold them at top dollar to unsuspecting pension funds. We ended-up with a global financial melt-down that we workers of the world are still paying for.
Two years ago in my August 22, 2011 column entitled, "Why we have recessions," we saw that our nations' banks were, and still are, holding almost $2 trillion in "excess reserves." "Excess reserves" are bank assets in excess of what the bank needs to cover their outstanding loans. With the proposed reserve requirements increased up to 5%, those excess reserves could still fund an additional $40 trillion in new bank loans. Since U.S bankers are swimming in reserves, like Scrooge McDuck in his vault, there should be no monetary stringency created by these "more rigorous" bank reserve requirements.
Until 2008, U.S. banks never had a significant amount of "excess reserves;" bankers always considered it bad business to have money sitting idle. But thanks to the world's largest private bank, the Federal Reserve, bankers were given tons of dough after they collapsed our economy and, instead of loaning out that money to the "job creators," they bought U.S. Treasury bonds. And thanks to the Financial Services Regulatory Relief Act of 2006, passed by a Republican-run Congress, we American taxpayers are now paying bankers interest on all of their reserves. They are not only collecting interest from their vast Treasury holdings, but they get additional, bonus interest on top of that. Since 2007, excess bank reserves have jumped from near zero to almost $2 trillion. With interest rates now at historic lows, the bankers' bonus check is a mere 7 billion taxpayer dollars per year. But if interest rates should rise to 5%, this banker welfare program will exceed $100 billion annually. All this money comes gratis from U.S. taxpayers and the bankers reciprocate with their boundless generosity, gratitude, and good will.
Why are taxpayers paying bankers interest? The official explanation is so that the Federal Reserve can more easily control our nation's money supply. When our economy gets too good, and too many workers are working, they can stifle it by raising interest rates on bankers' reserves. It's a win-win for the bankers. Traditionally, the "Fed" manipulated our economy by simply buying Treasury Bonds to increase the money supply, or selling them to tighten credit. Since the "Fed" no longer needs U.S. Treasury Bonds to control our economy, they should return the $2 trillion in bonds they recently acquired through "Quantitative Easing." The Treasury could then re-sell them and our U.S. Government could run deficit-free for the next several years.