Reports are surfacing that banks haven't noticeably increased lending because of the bailout money and they bloody well don't intend to, thanks. Gee, what a surprise, the bailout didn't fix what it was supposed to. No one could have predicted.
"Twenty-five billion dollars is obviously going to help the folks who are struggling more than Chase," he began. "What we do think it will help us do is perhaps be a little bit more active on the acquisition side or opportunistic side for some banks who are still struggling. And I would not assume that we are done on the acquisition side just because of the Washington Mutual and Bear Stearns mergers. I think there are going to be some great opportunities for us to grow in this environment, and I think we have an opportunity to use that $25 billion in that way and obviously depending on whether recession turns into depression or what happens in the future, you know, we have that as a backstop."
In other words, as long as banks are being allowed to buy up failed competitors for cents on the dollar, they're going to keep their powder dry and not lend. Add to that that they don't much want to lend going into a horrible recession, and that many of them don't look too liquid even after the bailout, and not only aren't they going to lend, they're going to keep contracting credit.
The correct policy responses are simple enough:
First, as discussed before, you give the FDIC a mandate to take over banks which are contracting credit. "Too sick to lend? Too sick to live." That will concentrate CEOs minds on doing what they're being paid to do (by the government) very well.
Second, use the Fed's leverage. It has made a pile of loans to the banks on lousy collateral through various facilities. No specific bank has to keep access. If the Fed says "are you not lending because you don't have enough money?" and they reply "oh no, we're fine" you should then reply "great, then you won't need special access any more!" If they reply "no, we're still low on money" you tell the FDIC to take them over, or you make an explicit deal of "if we buy X dollars you will do Y lending. Sign here."
Third: no more banks must be thrown on the market at cents on the dollar. All future banks must be run by the FDIC and either refloated as their own entities, or shut down. There must be no more "deals" available.
Fourth: no bailouts without effective control. Not only does the public get voting shares, it gets to choose the CEO. If the banks don't like that, they don't have to take the money. But if they don't take the money, and they don't lend, the FDIC takes them over and the government sweeps all the executives out. Their choice.
The US has shoved 5 trillion dollars at this problem since the crisis started last year. Enough is enough. Money alone is clearly not sufficient, and that means more stern measures need to be taken. The financial industry, whose hubris is so great they just announced 70 billion of bonuses for themselves after getting a taxpayer bailout, needs to learn that they exist for the purpose of serving the overall economy, not themselves. This is especially true of banks, whose entire business model relies on the government giving them the right to create money, to borrow money at concessionary rates that no one else receives, and so on. Banks are entirely creatures of the government who exist because the government gives them what amounts to a license to print money under certain circumstances. They are in no way a "naturally free market".
So if they won't do what they have to do, if they won't responsibly execute their duties to the country, then they will have to be made to do so, and it is the government's duty to make that happen.