Jonathon Trugman

Jonathon Trugman

Business

Fed chief’s policies reining in the banks

Last week Wall Street banks reported mostly record earnings, and yet most did not make as much revenue as last year or last quarter, which is puzzling.

In the parlance of the Street, it’s a miss on the top and a beat on the bottom.

But how can a bank miss on the top? The cost of capital to a bank is next to zero, because of Fed chief Ben Bernanke’s policies.

So if a bank wants to raise revenue, all it needs to do is take the almost free money and lend it out at 5 percent for a mortgage.

Wall Street banks, of course, know this. So what’s the problem?

Someone or something is reining in the banks.

Dodd-Frank, which was passed in 2010 and now governs the entire banking system, remains meaningfully incomplete.

Meaningfully, as in more than half the rules remain unwritten or not completely negotiated by the Fed and Treasury.

Because of this, the banks have no assurance that if they make loans today they won’t be penalized or forced to retroactively conform to new rules tomorrow.

So smart lawyers are telling the banks to be very cautious and focus their lending on loans that Uncle Sam will buy, like Fannie Mae-conforming mortgages. Lenders still make some business loans, but very few.

At the end of this winding road is Bernanke. The outgoing Fed chairman has made it very easy for the banks not to lend.

The Fed, by buying about $85 billion per month, has made it lucrative for banks to borrow at zero percent and invest the funds in Treasuries at 2 percent to 3 percent, thereby making a lot of money with very little risk.

Why would the Fed make it palatable for banks not to lend? To control inflation. Inflation occurs when too many dollars chase too few services and goods. So if the excess cash stays fenced in the bond market, lending is curtailed.

We need to get back to banks taking risks by making loans, and entrepreneurs taking the same risks that they can pay them back plus interest.

Those are two relatively simple, well-defined business risks on the same transaction.

And that’s America.