Can We Save the Banks, and Also Protect Consumers?

By Simon Johnson

The United States government’s strategy for its big banks is now quite clear. These banks have suffered big losses, so they are short on capital and ordinarily you would want them to raise more capital promptly (if this sentence doesn’t make sense to you, start with some “bad bank” basics). But, as we saw in the recently concluded stress tests, the Treasury does not wish to press this point. “Saturday Night Live” provided the hilarious and accurate explanation: The big banks are just too powerful.

Instead, under the guise of “regulatory forbearance” — i.e., the financial regulators’ version of “don’t ask, don’t tell” — banks will be given enough time to earn (and retain) sufficient profits to increase their capital back up to reasonable levels. In the meantime, they will continue to receive a great deal of financial support in the form of credit from the Federal Reserve and debt guarantees from the Federal Deposit Insurance Corporation. This is good for bank stockholders — and great for the people who run these banks — but not necessarily helpful for the economic recovery.

Can We Save the Banks, and Also Protect Consumers? - Economix Blog - NYTimes.com

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