Thursday, February 12, 2009

What are banks doing with the bailout money?

Many have been wandering what the banks are doing with the bailout money as they seem to be hoarding it, instead of helping to ease the credit crunch. In this article titled "Bank CEOs flogged in Washington" CNN is reporting the CEOs of 8 top banks being questioned by the law makers for the unwillingness to lend to consumers. So, the real question that we have to ask as tax payers is "what are the banks doing with our handouts?"

While I have no insight into the practices of banks, I can only postulate.  Here is what I think... Imagine you are a home owner getting squeezed by the credit crunch. If some one were to give you a lot of money that you could use for whatever you like, what would you do? Go and blow it out on a new car, new furniture, and big screen TVs and home entertainment systems? That would be one way to spend it, but if it were me, I'd hoard that cash and spend thriftily so I wont go into foreclosure. Now imagine a bank that has acquired many homes thru foreclosure proceedings, being squeezed by the credit crunch and forced to sell those homes at huge discounts to avoid bankruptcy. Now, if a benevolent government were to hand them a ton of other people's money, all of a sudden they don't have to feel the tightening of the screws any more. Instead of being forced to sell the homes at a huge discount, the bank can hold on to the properties much longer and can afford to reject the low ball offers. Instead of lending to the consumers at around 5.5% and risk loosing money again, it seems much more profitable to hold on to the houses longer in hope of a recovery and reduce the losses with the free money. In a way you cannot blame them, but the money was given for the specific reason of unthawing the credit markets. I could very well be wrong here, but I think this is the reason why the banks are behaving as they are. While the bankers get bailed out with public money to protect their assets, the consumer gets left out in the cold to be foreclosed. In any case, it is us, the consumer, that gets screwed once again!

1 comment:

Anonymous said...

Since the time immemorial the banks have been screwing the people. No surprises here.