The Federal Reserve Board on Tuesday announced the creation of the Term Asset-Backed Securities Loan Facility (TALF), a facility that will help market participants meet the credit needs of households and small businesses by supporting the issuance of asset-backed securities (ABS) collateralized by student loans, auto loans, credit card loans, and loans guaranteed by the Small Business Administration (SBA).
At some point, you have to wonder whether in the future we will need financial institutions at all. The way this seems to be headed is to a "central bank" system. That is one institution, owned by taxpayers, chartered to lend directly to the american population. Good bye banks, credit unions, thrifts. Who needs them when you can get a subsidized loan from your local FedBank?
Okay. I am being a bit dramatic here, and leaning to a belief not entirely supported by the facts as they stand today, but it sure seems that the government is getting closer and closer to stepping on the toes of traditional banking institutions. True, we have a short-term problem in need of attention, but I am more or less drawn to the conclusion that in the haste to push more credit out the door in an effort to "fix" the economy we are throwing caution to the wind, making decisions that could leave a long-lasting scar on our banking system.
Yes, the efforts of a few (relative to the many fine financial institutions chartered to serve the credit needs of Americans) have "left a mark" as they say. However, in Washington's attempts to correct those mistakes, the sound business practices and efforts of surviving banks and credit unions are being undermined. In negatively impacting solid strategy, Washington is serving as a cause of the demise.
Consider the case of IndyMac. IndyMac failed, sort of. In a preemptive effort the bank was put into conservatorship. It is essentially being run by the FDIC, a government regulator. The FDIC has an aggressive pricing policy at IndyMac. The rates for most of their deposit products, especially short-term certificates, handily beat national averages.
Here is why that is a problem. A recent Wall Street Journal article covered the increasing competition for consumer deposits. They called it a deposit war. IndyMac is undeniably a participant in this war. Because of the FDIC's own efforts at IndyMac, the cost of funds for institutions working the same market have to be higher just to retain existing accounts. In establishing an above-market pricing strategy the FDIC is directly competing with institutions that they regulate. Competition is absolutely a good thing, but it isn't really a competition in this case.
Back to my original doomsday perspective. I truly believe that the banking system will be forever changed due to the efforts of regulators. To be clear, I am not talking about investment banks, et. al. I am referring to the ABC National Banks and XZY Federal Credit Unions now serving people in communities across the country.
The real question for me is not whether the system will be changed, but just how drastically. Unfortunately, that question will likely remain unanswered for some time. We won't know until the dust settles, the sky clears, and we see what we have left.
