End of A Banking Era?

by Steve Soto

After initially opposing the idea, the Bush Administration has changed course and now wants to buy into banks and take an equity stake rather than buy Wall Street’s toxic assets.

In what amounts to a partial and temporary nationalization of the banking system, the Treasury Department plans to use the first $250 billion of congressionally-authorized funds to buy preferred stock from nine large American lenders in the hopes that this will spur these entities to start lending money once again.

This is exactly the same approach suggested by GOP representative Spencer Bachus and the banking industry months ago, and supported by congressional Democrats, but rejected by Treasury Secretary and former Goldman executive Henry Paulson in favor of his plan to make the taxpayers foot the bill for Wall Street’s mortgage-backed securities and credit default swaps. Now, with British Prime Minister Gordon Brown leading the way for Europe, the world economic experts are telling the United States that stabilizing the banks is better than bailing out Wall Street for its mistakes, and Treasury is adjusting to that.

There are of course no guarantees that the banks will actually use the new capital to make loans instead of just improving their balance sheets, or control executive compensation or limit dividend payments as Congress wants. But with Congress controlling the purse strings here, and with a new administration and Treasury Secretary about to take office, the banking system will be on a short leash.

I’m more interested in the back end of this set of moves. Before we turn the car keys over once again to Wall Street and the banking system, what remnants of these moves will remain to ensure that Main Street doesn’t get stuck again with a crashing economy for the sake of our government worshipping at the altar of free-market economics?