Backdoor Bailout for Wall Street, Back of the Hand for Main Street

After nearly a decade of living inside the beltway, not much happens in Washington that surprises me anymore. But I was astounded when I heard the Fed say that it would keep target interest rates at exceptionally low levels until at least the middle of 2013. That’s right—two full years! They actually put a date on it! Unprecedented!

To me, the Fed’s policy is nothing more than a backdoor bailout for the Wall Street mega-institutions and the back of the hand for our nation’s community banks.

Unlike the Wall Street institutions that make their money based on volume and transaction fees, community banks do business the old-fashioned way. They pay their customers interest on their savings, lend those deposits back into their communities to create jobs, and price those deposits and loans at a rate that lets them stay in business.

But with the Fed setting rates at nearly zero percent and slack credit demand, how are community banks supposed to make a viable spread on their funds?

Most community banks are swimming in liquidity. Meanwhile, they’re holding short-term investments (encouraged by their field examiners, by the way) under the assumption that rates would begin to rise within the next year or so. Now they are faced with at least two more years of zero interest in a struggling economy.

The Wall Street money houses are basically getting free money out of this deal that they can arbitrage and hedge worldwide. What about the community banks that are trying to turn this economy around? They are stuck with deposits that cost more than the federal funds rate, slack demand and a 2.15 percent 10-year Treasury.

Once again, Wall Street gets a bailout on the backs of Main Street’s community banks, small businesses and hard-working Americans. It is a slap in the face.