Why the Banks are not lending money to Main Street

 There has been an ever growing chorus of protest over the past 24-months about government bailouts to the financial industry (bailouts of GM, the GSE's, and others are even worse, though outside the scope of this analysis).  American citizens across the country have been attacking the use of their tax dollars to socialize private losses of the big banks, all in the name of stabilizing the financial system to avoid a larger catastrophe.  While there is some merit in protesting this point, team Obama can always cite the amount of TARP money that has been paid back to the government.  Protesters are missing the real nefarious transfer of wealth from Main Street to Wall Street and Washington... and it is called the Carry Trade.

Politicians are telling us that they are utilizing every tool at their disposal to fight the credit crisis, and one of the big guns they have is the ability to manipulate interest rates.  The Federal Reserve has opened what is called the Discount Window to banks to provide them with loans from the government at interest rates that are close to 0%.  The purpose of this tool is to provide troubled banks with capital at a time when capital is very scarce.  We are then told that banks will use these capital flows to lend money out into Main Street, to really get this recovery train rolling.  So with all this basically free money from the government, lending from banks must have really picked up in the past 12-months right?

What is this?  Loans to commercial and industrial users has collapsed at the highest rate of change in the postwar era?  How can this be?  The government is giving all of these banks free money, at 0% interest rates, to lend money to the real economy.  What is going on here?  Well I will answer you're question with two of my own.  First, (1) where are the banks putting all of this free money, and second (2), since this is obviously not working, why are we still doing it?

Well in answer to this first question, this is where all the free money the government is lending to the banks is going.

Hold on, wait just one second. So this graph means that banks have just bought a ton of US Government securities (debt)?  Why are they buying all of these Treasury Bills?  Here it is: banks borrow money from the federal government at 0% interest rates, and then then they lend it right back to the federal government at 4% interest rates (depending on term, maturity, etc), often times at ridiculous leverage to maximize profits (borrow $10 for every $1 of capital or more).  So our dear leaders in the federal government are giving the banks a completely risk-free trade robbing the feds blind.  Are they just incompetent, is there another reason, or is there something more to this?  

The honest answer is that nobody actually knows, but the following are some possible reasons: the feds are just deluding themselves into thinking that banks will actually start lending to Main Street eventually, the feds are in over their head and just don't know what to do otherwise, or, drum roll please, the feds need somebody to buy their treasuries to finance Team Obama's ridiculously massive deficit, and they are giving banks a risk free trade with guaranteed profits to finance this deficit.  Did any readers happen to notice that I used the work "nefarious" at the beginning of this analysis?  Savers be damned.  Taxpayers be damned.  Team Obama needs somebody to finance our deficit, and Team Wall Street always needs a schmuck.