After nearly a decade of living inside the Beltway, I have learned not to be surprised by much in Washington. But I was astounded this month when the Federal Reserve announced its intention to keep interest rates at zero percent for at least the next two years. I kept staring at that number, 2013, assuming that it was a mistake. Surely the governors meant 2012, which would have been bad enough, I thought. But at least 2013? What is going on, I wondered. Why put a fixed date on it at all? Now their hands are really tied!
I have been a community bank owner and was president of a bank that served hundreds of community bankers for more than 20 years. I have always known that the model of community banking is different from that of Wall Street banks. Unlike Wall Street banks, which make their money based on volume and transaction fees, community banks make their money the old-fashioned way. They pay their customers interest on their hard-earned savings, they lend those deposits back into their communities to small businesses that create jobs, and they price those deposits and loans to make enough on the difference to pay their employees and utility bills, and maybe even to purchase a scoreboard for their local high school football team.
That is, until now.
Now the Fed is pricing their deposits. Now the Fed is setting the spread. With nearly zero percent rates and slack credit demand, how are community banks supposed to make a viable margin on their funds? Community banks are swimming in liquidity as depositors pour their savings into their local banks in search of safety and security. Most community banks are holding short-term investments because they figured that rates would begin to rise in the next 12 months or so. After all, rates have been near zero for almost three years.
And what about fixed-income savers and retired senior citizens who were encouraged for years to save for their retirement so as not to be a burden to their families or their government? How long will their savings last when rates are held to artificially low levels?
One would think that the Fed would have considered the unintended consequences of such a unilateral move. In short, the Fed has taken away community bankers’ ability to compete in the free market. In the midst of a depressed economy with low loan demand, the central bank is exacerbating the financial crisis.
Why? In my view, the Fed’s policy is nothing more than a backdoor bailout for the Wall Street mega-banks and investment houses; it amounts to the back of the hand for the community banks of this country. The Wall Street money houses are basically getting free money that they can hedge and arbitrage worldwide to make baskets of money, while local banks are stuck with deposits costing more than the federal funds rate, sluggish loan demand and a 2.20 percent 10-year Treasury. For the extended future, earnings contractions will accelerate as the investment portfolio prepays and runs off, and capital will be difficult if not impossible to raise, stifling growth on America’s Main Streets.
The more than 7,000 community banks in this country did not create this crisis, but they have been asked to pay for it over and over again. Surely the Fed has more bullets in its monetary policy arsenal than turning its guns on the very players in our economy that create jobs and support small business. Once again, Wall Street gets a bailout — on the backs of Main Street’s banks, small businesses and hardworking Americans.
The writer is president and chief executive of the Independent Community Bankers of America.