Yesterday on CNBC famed bank analyst Meredith Whitney questioned whether banks who have received government aid are lending that money out abroad rather than into the US economy.
“Does US taxpayer money go toward funding foreign loans?” Whitney asked. “As a taxpayer, I don’t see why it should.”
She went on to say that she expects a “strong wave of protectionism” with US banks.
We expect that most readers will object to Whitney’s argument as senseless protectionism that might actually make banks weaker. It seems obvious that banks should lend to the best qualified borrowers rather than politically favoured constituencies. What’s more, cutting off the international competitiveness of our financial institutions seems unwise. This looks a lot like dangerous political meddling in banking.
But it’s not as irrational as it sounds. The bailout was sold to the American people and lawmakers on the very explicit grounds that it was necessary for the US economy to have banks lend to US business. It wasn’t just a Wall Street bailout, the promoters of the TARP shouted, it was a “main street” bailout too. If banks are lending taxpayer money abroad, they are at least partially renegging on that deal.
Would banking protectionism leave banks less profitable? Almost certainly. But the point of the bailout was not to make banks profitable. It was to avoid systemic risk and support the national economy. (For the sake of argument, out aside questions about whether it did either of these things.) Banks may want to be left alone with the TARP money but that clearly is not an option. It was granted to them for public reasons and their use of the funds will be subject to public scrutiny.
This is the price we pay for the deeply interventionist role we’ve given the government in our financial system.