It’s time for banks to pay back their debt to the rest of us

July 29, 2011

The devilish deficit dance going on in Congress right now has been a convenient distraction for big U.S. banks. They’ve not only escaped new taxes for now, but they also are relishing their taxpayer bailout by earning robust profits.

Except for Bank of America, the major U.S. banks are doing just fine, thank you. Yet for all of the abundant generosity and forgiveness of the American people, have banks lent out enough money to Americans to make a difference to the economy at large?

No. Banks are lending less to consumers than they did in 2007, the year before the full-blown financial meltdown, according to recent Federal Reserve Consumer Credit tallies.

Outstanding consumer credit was $2.5 trillion in 2007 compared to $2.4 trillion through May of this year. Revolving credit was down fivemo percent in the first quarter of this year. Total consumer lending was down about $100 billion in 2010 and 2009 alone from 2007 levels.

The net effect was less money flowing to consumers, who are the engine of the U.S. economy. Even if you wanted to build that addition to your home or buy a foreclosed home, good luck getting a large loan from a bank — unless you have perfect credit ratings.

Banks’ bowstring-tight standards for mortgages and home-equity loans triggered the lending squeeze. The Fed’s July 13 Monetary Policy report told the story:

“Mortgage originations trailed off with the end of the refinancing wave that occurred last fall, when interest rates declined … Bank lending through home equity lines also remained extraordinarily weak, reflecting in part tight lending standards amid declines in home prices that cut further into home equity.  Both credit card and other consumer loans from banks contracted, on balance, over the first half of the year.”

For taxpayers, the bailout begun in 2008 worked as a mega-banking stimulus unrivaled in history. The largest banks were saved and became bigger. Their trading profits and brokerage operations were protected. Then they were able to pour their taxpayer-enabled profits into lobbying against the needed financial reforms of the Dodd-Frank law. Undaunted, banks are still free to lend out money to credit card holders for 14 percent or more.

In the economy at large, though, layoffs continue, the housing market is still in intensive care and the Federal Reserve’s stimulus plan is a bust.

Despite their soaring profits, megabanks still owe U.S. taxpayers money from the bailout. A new study of released by the Center for Media and Democracy shows that $1.5 trillion of the $4.8 trillion in federal bailout loans are still outstanding.

An even bigger boondoggle is the government’s effective nationalization of the U.S. home mortgage market. Through the purchase of mortgage backed securities and debt from government-seized Fannie Mae and Freddie Mac, the Fed has supported the moribund housing market.

The Obama Administration has yet to put forward a plan to resolve its ownership and continued funding of Fannie and Freddie, two fiscal black holes.  Meanwhile, homeowners are still getting foreclosed upon with no end in sight.

“The Federal Reserve and the Treasury have spent $1.6 trillion in a bank-shot to save the housing market by using the same financial companies that got us into this mess,” said Conor Kenny, lead author of the Center study. “That’s more than 800 times what they’ve spent directly to keep homeowners in their houses, and the banks have only made money off the whole thing.”

For American taxpayers, the social return on the bailout has been dismal. Bank foreclosures have resumed their rise. So-called “robo-signing” abuses in home purchases where mortgages are fudged to the benefit of banks also continue. And jobless claims are rising.

It’s time for banks to pay back their debt in a profound way. Yet first, an attitude adjustment is in order: Financial speculation in bank profits should be taxed to pay for education and health care. This trading tax will also reduce the federal deficit over time.

A “Robin Hood” tax like this would even the social capitalism balance sheet. Such a plan is afoot in the U.K. and it should be on the table in any larger discussion

 

28 comments

We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see http://blogs.reuters.com/fulldisclosure/2010/09/27/toward-a-more-thoughtful-conversation-on-stories/

Several banks are also paying fines that are the largest in history for their bad behavior. Lobbyists can convince the Teaparty and other undereducated legislators that taxing banks is a bad idea. However the Justice Department is much tougher to convince.
The DOJ action also increases the liability of those banks in Civil Court.
So even though banks have entirely outsmarted the legislature we are lucky enough to have a Justice Department that hasn’t been outsmarted.

Posted by Arafel | Report as abusive

We are still owed a proper investigation, not the 1 day circus between Carl Levin and Lloyd Blankfein, but a real Ferdinand Pecora hearing where parties are held accountable. I don’t buy that nonsense that everyone was to blame. Robo-signing is a form of fraud, plain and simple. No one put the banks up to it. A Robin Hood tax like you suggest would be nice, but I’d rather subject the perpetrators to a genuine investigation and throw the banksters behind bars where they belong.

Posted by K-dub | Report as abusive

Excellent article. One has to admit that a couple of bankers earning tens of millions of dollars is NOT in any way a positive contribution to a country, no matter whether the economy is doing great or drowning in red ink. Especially when it comes to bailouts with taxpayers money. I thought Obama promised to do something against this, but until now it remains with empty words and a worse, not better, situation for the average American. But, taxing banks is not enough. There should be a law, and a very strict REGULATING law, against any form or kind of bonus and other ridiculous renumerations in the banking sector for ever. Let them threat to go to Asia, who cares. Their clients are all but one in the US, UK and Europe so they will directly destroy their own market share by doing so.

Posted by FBreughel1 | Report as abusive

It’s true that we bailed them out. The payback should be (or should have been) defined by the terms at which banks reimburse their loans.

I don’t think it’s wise to push banks back into the habit of making bad loads, as they did too much before the crisis.

It may take a while to rebound from this mess. In the meantime, I think banks and consumers are proceeding cautiously. I don’t think it’s anyone’s fault.

Posted by LoveJoyOne | Report as abusive

In full with next to 0% loans from the fed, big banks (10 first own 77% of assets) received over 15 trillion not 4.8
They could loan NOW 13 trillion at 4% interest maximum and 7%-9% for credit card not 10-39%!!!

Posted by crispy40 | Report as abusive

It’s time for MAXIMUM wage laws. The “socialists” in France who are moderate social conservatives are thinking of 20 times minimum wage… THAT LOW!!
In France min wage is around $12 and cost of living is more than the US (25-430% more. This includes 5 weeks of paid vacation + about 13 paid Holidays.
French productivity as a result is far above American productivity (I forgot by how much but it’s similar to German)
Higher salaries + stock options may be possible but would no longer be deductible to companies for tax purpose: an idea which time has come!

Posted by crispy40 | Report as abusive

Basically, the banks got away with and continue to get away with very bad behavior. The irresponsible lending practices they followed in the run up to the meltdown were one of the two proximate causes of the meltdown. The other proximate cause was allowing mortgage lending to be like investment banking – investmentizing mortgages is how I look at it. The creation of the CDOs and other derivatives basically allowed the banks to get the money they’d lent in mortgages back so they could lend the money again. This would plausibly be a good thing if there was some massive re-industrializing of the US and we needed a lot of liquid capital to fund the building of manufacturing or other industrial infrastructure. But that’s not happening nor is it going to happen in the regulatory environment in the US today.

This article offers some good ideas but I have better ones. First, we need to bring back the Glass-Steagall separation of investment banking and commercial banking. If a bank makes a mortgage, it has to keep the mortgage and make its money from the interest it earns from it. Second, banks should not be making the decision of foreclosure vs loan restructuring. There should be a government agency making that decision. Banks demonstrably have been unwilling to restructure their loans and have been able to take the relatively small loss on the drop in property value while simultaneously imposing a huge social cost on the society. The outside agency should allow foreclosure only in the event that there is no chance that the mortgage can be saved. If restructuring could save the mortgage, the banks should be forced to restructure and take the loss.

Posted by majkmushrm | Report as abusive

Part of the reason banks are lending less to consumers is that consumers are not borrowing like there was no tomorrow.
Yes, standards have tightened but so have consumers. It is not fair to assign 100% of the “credit squeeze” to the banks. Banks can’t lend if nobody is coming through their doors asking for money.

Posted by stanrich | Report as abusive

Don’t worry. The 0bama administration has recently started forcing banks to settle out of court and relax their mortgage underwriting standards and make loans to people with no job. No job with a new mortgage! This is what caused the first financial crisis and now another one already?! Have you learned nothing at all?

“This trading tax will also reduce the federal deficit over time.” More astounding ignorance. This Robbing Hood Tax or Financial Transaction Tax will be net revenue negative. Negative. Do some research on what happened to Sweden when they tried the exact same tax for only a few years.

IMF states in the Final Report For The G-20, June 2010 about the financial transaction tax, “Its real burden may fall largely on final consumers rather than, as often seems to be supposed, earnings in the financial sector…A tax levied on transactions at one stage ‘cascades’ into prices at all further stages of production.”

Posted by rhone | Report as abusive

It is naive to think that all that Treasury money was intended to help the American people. No one in the know thought that. It was a raid on the Treasury to enrich the “campaign contributors” who own the politicians on both sides of the aisle. The transfer of wealth was from the powerless to the powerful, as it has usually been in the USA.

The real question is why our supposedly “Supreme” Court legalized payoffs to all politicians by corporations. The issue about “free speech” is the most laughable since FDR managed to promote the idea that the Bill of Rights, specifically the Second Amendment, was intended to keep the Government from denying itself an Army. The Bill of Rights applies exclusively to flesh and blood organisms who are US citizens.

If you let thieves run your country, then you get what you deserve. But then, if you just think you can influence things, you may be deluded but still not deserve what they do to you and to yours.

Posted by txgadfly | Report as abusive

When is America going to realize that the Big Banks and the hedge funds/private equity firms have Congress in their pockets and have for years. It’s corporate government, a PC phrase for economic fascism. They own Congress. Read Andrew Jackson’s 1832 Veto of the Second National Bank to see what our 7th President had to say about the power of national banks.

Posted by neahkahnie | Report as abusive

Great article.

Great comments.

It’s like reading Ben Franklin: “what is robbing a bank compared to founding one?”.

Posted by CuriousOne | Report as abusive

Americans get and HAVE what they deserve.

The fact that only 53% of elegible voters bother to cast their votes explains why the big pac money has taken over your gov’t , judiciary and presidency.

It boggles my mind that you wish your ‘democratic system’ to the rest of the untamed world at the end of a gun and yet everyday Americans, rather than storm the streets and demand Washington change it’s ways, don’t themselves practice what they preach, but rather sit around complaining about the oligarchy going on in DC. The reason banks and big money get heard is because they speak OUT… Ordinary Americans don’t even take a hour every two years to vote. hahahaha. YOU DESERVE WHAT YOU GOT…

Posted by TED53 | Report as abusive

Didn´t we just come off from a near collapse of the banking system due to loans issued for people with questionable credit? is it something we want to encourage again? we can´t have everything at the same time.

Also please notice that house prices are still going down, reverse mortgages keep (and will keep going down) as this trend continues.

The banks payed with interests and even dividends for the loans they took and the shares issued with taxpayers money. Stop demonizing the financial business… it´s a no win situation.

Posted by OrlandoGomezT | Report as abusive

Finally someone said it! Corporations that do business in the U.S. should be contributing to a big pot of money that gets used solely for education. We all benefit from a well educated workforce and I would be amenable to some of my tax dollars going there but corporations have most of the money. I hadn’t thought of health care but that’s a good idea too.

And – while I’m venting – wage earners SHOULD NOT be paying taxes on what they EARN anyway. We should be paying a tax on what we consume. Exclude food and medicine and levy a “consumption tax” on everything else. Completely fair – if you consume more you pay more. And it gets rid of this ridiculous levy on our labor.

Thanks for keeping these hoodlums in the spotlight.

Posted by SGinOR | Report as abusive

http://www.govtrack.us/congress/billtext .xpd?bill=h110-1424

SEC. 2. PURPOSES.

The purposes of this Act are–

(1) to immediately provide authority and facilities that the Secretary of the Treasury can use to restore liquidity and stability to the financial system of the United States; and

(2) to ensure that such authority and such facilities are used in a manner that–

(A) protects home values, college funds, retirement accounts, and life savings;

(B) preserves homeownership and promotes jobs and economic growth;

(C) maximizes overall returns to the taxpayers of the United States; and

(D) provides public accountability for the exercise of such authority.

When will the banks fulfill the contract?
http://www.youtube.com/watch?v=-I92oNTmZ ow

Posted by Treeeblehooks | Report as abusive

As a friend of America, it saddens me to read socialist nonsense like this.You won’t help your poor by tearing down your successful.The above idea would guarantee more instability, irreplaceable lost revenue and family miseries from closed businesses and many thousands more disappearing jobs. There’s rapidly growing financial centers outside the US and Europe ready and waiting to take up new capital provided by fleeing businesses and this idea would throw America’s baby out with the bathwater! The rest of the world is racing ahead, expanding their financial businesses, not burying them!
Bad US lending and borrowing practices should never have occurred but wasn’t it Bill Clinton who pushed the idea that everyone was entitled to a mortgage. But where were American politicians (including Mr Obama)when all that borrowing entitlement mentality was being encouraged?
Should Wall Street and NYC finally look like Detroit, then advocates of the widely disparaged and rejected market damaging Robin Hood scenario (above) would only have themselves to blame. Too late then. It would be all over, red rover.

Posted by Foreign | Report as abusive

If you vote to have public corporations pay taxes to fund the public, like education and health care, then, in a short time, there will be no more public corporations as they are defined today. They will change them into something else.

There will always be those who want to tax others, and those that do not want to be taxed.
I don’t think anyone is only one of those.

Posted by tmc | Report as abusive

“If you vote to have public corporations pay taxes to fund the public, like education and health care, then, in a short time, there will be no more public corporations”
Oh Yeah?
There is an education tax and a health care “tax” (actually an insurance premium paid by employers) – not just corporations- in Europe and it works just fine. Business benefits from good education and good health doesn’t it?

Posted by crispy40 | Report as abusive

Appears they are! Did you see the loses last quarter-$Billions! Now, what about those that lied to get a free home and walked away without cause-how are these flakes paying? How many have been prosecuted for lying on a Fed backed loan doc-a Federal offense-how many? That’s what I thought! Start in Nevada and you find thousands! I’m all for helping those that had good intent, but too many gambled with our future! Thank you Bill Clinton-it didn’t work-in the interest of fariness and equality!

Posted by DrJJJJ | Report as abusive

Appears they are! Did you see the loses last quarter-$Billions! Now, what about those that lied to get a free home and walked away without cause-how are these flakes paying? How many have been prosecuted for lying on a Fed backed loan doc-a Federal offense-how many? That’s what I thought! Start in Nevada and you find thousands! I’m all for helping those that had good intent, but too many gambled with our future! Thank you Bill Clinton/progressives-it didn’t work-in the interest of fairness and equality!

Posted by DrJJJJ | Report as abusive

Appears they are! Did you see the loses last quarter-$Billions! Now, what about those that lied to get a free home and walked away without cause-how are these flakes paying? How many have been prosecuted for lying on a Fed backed loan doc-a Federal offense-how many? That’s what I thought! Start in Nevada and you find thousands! I’m all for helping those that had good intent, but too many gambled with our future! Thank you Bill Clinton/progressives-it didn’t work-in the interest of fairness and equality!

Posted by DrJJJJ | Report as abusive

Appears they are! Did you see the loses last quarter-$Billions! Now, what about those that lied to get a free home and walked away without cause-how are these flakes paying? How many have been prosecuted for lying on a Fed backed loan doc-a Federal offense-how many? That’s what I thought! Start in Nevada and you find thousands! I’m all for helping those that had good intent, but too many gambled with our future! Thank you Bill Clinton/progressives-it didn’t work-in the interest of fairness and equality!

Posted by DrJJJJ | Report as abusive

Appears they are! Did you see the loses last quarter-$Billions! Now, what about those that lied to get a free home and walked away without cause-how are these flakes paying? How many have been prosecuted for lying on a Fed backed loan doc-a Federal offense-how many? That’s what I thought! Start in Nevada and you find thousands! I’m all for helping those that had good intent, but too many gambled with our future! Thank you Bill Clinton/progressives-it didn’t work-in the interest of fairness and equality!

Posted by DrJJJJ | Report as abusive

Appears they are! Did you see the loses last quarter-$Billions! Now, what about those that lied to get a free home and walked away without cause-how are these flakes paying? How many have been prosecuted for lying on a Fed backed loan doc-a Federal offense-how many? That’s what I thought! Start in Nevada and you find thousands! I’m all for helping those that had good intent, but too many gambled with our future! Thank you Bill Clinton/progressives-it didn’t work-in the interest of fairness and equality!

Posted by DrJJJJ | Report as abusive

Appears they are! Did you see the loses last quarter-$Billions! Now, what about those that lied to get a free home and walked away without cause-how are these flakes paying? How many have been prosecuted for lying on a Fed backed loan doc-a Federal offense-how many? That’s what I thought! Start in Nevada and you find thousands! I’m all for helping those that had good intent, but too many gambled with our future! Thank you Bill Clinton/progressives-it didn’t work-in the interest of fairness and equality!

Posted by DrJJJJ | Report as abusive

Appears they are! Did you see the loses last quarter-$Billions! Now, what about those that lied to get a free home and walked away without cause-how are these flakes paying? How many have been prosecuted for lying on a Fed backed loan doc-a Federal offense-how many? That’s what I thought! Start in Nevada and you find thousands! I’m all for helping those that had good intent, but too many gambled with our future! Thank you Bill Clinton/progressives-it didn’t work-in the interest of fairness and equality!

Posted by DrJJJJ | Report as abusive

Rediculous nonsense! Making the banks loan more money to those unable to pay them back will just repeat the massive failure that Barney Frank and Chris Dodd worked so hard to create!

Posted by zotdoc | Report as abusive

[…] is exactly the type of revenue raising proposal that makes sense in the US right now. As noted in Reuters Money over the weekend, most of the major US banks are pulling in profits while they still owe taxpayers […]

Posted by Politics of Poverty: Ideas and analysis from Oxfam America's policy experts » Blog Archive » Where the money is | Report as abusive