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In U.S. Monetary Policy, a Boon to Banks

The federal government, in ways explicit and implicit, profoundly subsidizes and shelters the banking industry, and the protection is so well established that we barely notice it anymore.

The most pronounced development in banking today is that executives have become bolder as their business has gotten worse.

The economy is clearly weaker than expected, and housing prices are falling throughout the land, eroding bank asset values. Yet regulators are on their heels in Washington as bankers and their lobbyists push back against the postcrisis regulations, even publicly condemning the new rules.

In a well-covered exchange, Jamie Dimon, JPMorgan Chase's chief executive, challenged Ben S. Bernanke, the Federal Reserve chairman, about the costs and benefits of the Dodd-Frank rules. More attention has been paid to the banker's audacity, but the response of the world's most powerful banking regulator was more troubling. Mr. Bernanke scraped and bowed in apology without mentioning the staggering costs of the crisis the banks led us into.

So this is a good occasion to step way back to understand just how good the banks have it today.

The federal government, in ways explicit and implicit, profoundly subsidizes and shelters the banking industry. True since the 1930s, it is much more so today. And that makes Mr. Dimon no capitalist colossus astride the Isle of Manhattan, but one of the great welfare queens in America.

The protection is so well established that we barely notice it anymore. The government supervises bank activities and guarantees deposits. When people walk into a bank, they assume it is as safe as their local supermarket.

Banks are also the mechanism through which we express economic policy, especially as fiscal stimulus has been eliminated as an option. The result is that the government pays a "vig" to banks in order to reach its policy goals.

When the Federal Reserve lowers interest rates to help buoy the economy during a slowdown, banks are the first beneficiaries. As the Fed lowers short-term rates, banks borrow cheaply and lend out for a lot more, making any new lending highly profitable (assuming the banks make good loans). This is classic monetary policy, and supported nearly universally. But let's not pretend that it isn't a boon to banks.

Some think bolstering banks' fortunes is a major goal, not a side effect.

"The Fed not only wants to stimulate the economy but also to recapitalize the banks, and this is a stealth technique to do it," said Herbert M. Allison Jr., a former investment banker who has turned banking apostate in a new white paper called "The Megabanks Mess," published as a Kindle Single. The reason "banks aren't doing more lending is that they still hold a lot of troubled assets that tie up equity."

Then there are the more subtle subsidies and protections. Take regulatory forbearance. In 2009, regulators gave banks a gift on their commercial real estate loans. They allowed banks to look primarily at whether the loans were current, rather than at whether the underlying value of the property had declined. Of course, given the commercial real estate collapse, this had the effect of protecting banks from write-downs.

Banks and regulators say this is justified because an underwater borrower isn't necessarily going to default. True, but it's hard to see how those borrowers -- and therefore the banks -- are better off for the crash in their collateral.

Commercial real estate is the least of it. The government is profoundly subsidizing the housing market, too. Hardly a loan gets made today by a bank that isn't guaranteed by either Fannie Mae, Freddie Mac or the Federal Housing Administration. There is no subprime mortgage business outside of the F.H.A. When banks make mortgages and sell the credit risk to the government, they make a quick, safe profit.

The first effect of these policies, for better or worse, is to keep a floor under the housing market. But it also helps banks that own trillions in real estate assets that the government is propping up.

Another way taxpayers coddle the biggest banks is by implicitly guaranteeing their derivatives business. JPMorgan, widely viewed as safe and well managed, is a huge beneficiary here. It had $79 billion worth of derivatives on its books in the first quarter. Even if it's hedged, prudent and has thin margins, it's still going to throw off a nice chunk of profits.

Institutions on the other side of these trades wouldn't enter contracts without believing that they have some underlying protection — protection that comes from the government.

"No sensible person would put a nickel on deposit in the normal course given the enormity and opacity of the derivatives portfolios," said Amar Bhidé, a former trader and business professor at the Fletcher School. "It's entirely a function of deposit insurance and the implicit guarantee that the JPMorgan counterparties have."

The government's actions in the financial crisis only cemented that certainty. Counterparties and investors that were previously not guaranteed, like holders of money market funds, were protected at every turn.

This bailout never ended. "In effect, we nationalized the biggest banks years ago," Mr. Allison said. "We implicitly guaranteed them. The taxpayers are still the ultimate owners of the risk in those banks -- they just don't get equity returns for that ownership."

So when taxpayers hear a bank chief, like Jamie Dimon, complaining, it's worth keeping in mind that his 10-figure paycheck is largely coming courtesy of us.

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