Money Matters - Simplified

Economic Outlook: The new bad

President Barack Obama at a college near Albany, N.Y., assailed large banks for protecting a student loan subsidy Congress has voted to discontinue.

The bill, which is headed to the Senate, would save $80 billion in federal subsidies given to banks each year to provide loans to students, Obama said.

"The thing is the government also guarantees the loans in case the students don't repay. So, we're subsidizing banks to take on the risk of lending money to students even though the taxpayers are absorbing the risk, anyway," Obama said at the Hudson Valley Community College in Troy, N.Y.

A week after Obama, speaking at Federal Hall in New York, admonished banks to take on more civic responsibility, he said the government should "cut out the middlemen, the banks," in the student loan program -- in which banks, he said, collect the subsidy and dodge the risk. Worse yet, he scolded, "we are already seeing the special interests rallying to save this giveaway," saving a special jab for "large banks, many of which benefited from taxpayer bailouts during the financial crisis," for "lobbying to keep this easy money flowing."
"Ending this unwarranted subsidy for big banks is a no-brainer for folks everywhere -- everywhere except Washington, that is," Obama said.
This makes it, once again, a tough week for banks politically, as European leaders of the Group of 20 nations have pledged to get tough on huge bonus paychecks that leaders, including U.S. leaders, feel encourages risky investments.
It remains to be seen what agreement can be reached in Pittsburgh Thursday and Friday on an issue often said to be pointless to tackle if leaders do not reach a full consensus. But the pressure is on. Large banks are the new bad.

Behind a get-tough scheme on an international scale, however, leaders know financial firms do not survive in a country that is the only one enforcing a draconian pay system for employees. On the pay issue, it's all for one or don't bother.

On the other hand, how much political willpower will remain for world leaders to tackle bank bonus checks six months down the road? And world leaders also know that it may be a now-or-never proposition.

Markets Monday stalled of their own accord with investors worried that a prolonged run up -- one of the longest in history -- has to end sometime.

The Dow Jones industrial average, to choose one index, is up 46 percent from March and poised to break above 10,000 for the first time since Oct. 6, 2008. But, the sentimental number may not mean much in markets where reality checks are the norm.

In Monday's reality check, the DJIA turned lower following a down day in Asia and Europe.

Copyright 2009 by United Press International.

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