Cheap money for all, not just the banks: Column

Duncan Black | USATODAY

Sen. Elizabeth Warren, D-Mass. recently proposed offering federal student loans at the same interest rate that banks can borrow through the Federal Reserve discount window. It's a worthy, if modest, idea, applying only to new borrowers and lasting only a year. But it does raise a good question: why do big banks, especially, have access to loans at interest rates that the rest of us do not?

In theory there is a good answer to that question. Specifically, the role of banks in lending, whether to individuals or to businesses, is to do quality underwriting and make loans (or reject them) at interest rates that reflect the underlying riskiness of the loan. However, recent history has exposed the fact that our banking system is quite flawed and the ability of banks to adequately judge risk is in serious doubt. More than that, simple bank lending has taken a back seat to trips to the Great Casino, Wall Street. The big banks, especially, are more interested in gambling their low interest loans in the stock market and various other financial assets and derivatives than they are in lending to, for example, new small business owners. It's more fun, and potentially more lucrative, especially if failure is rewarded with a federal bailout, either by taxpayers or by the Federal Reserve. Heads they win, tails we lose.

If big banks can get low interest loans to finance their trips to the Great Casino, why can't I? Why can't all of us?

Many of us lost during the Great Recession. Trillions of dollars in housing wealth evaporated when the housing bubble burst, and many homeowners found themselves underwater, with homes valued less than their mortgages. The banks that lent the money for those mortgages, the banks with the supposed loan underwriting expertise, were bailed out in various ways. The homeowners? Not so much.

This isn't just a question of fairness. Consumer debt -- mortgages, credit cards, and student loans -- has been a drag on the economy since the economic crisis began. Low interest loans available to all of us, ones we could use to pay down existing debt, would boost aggregate demand and help to push the economy out of its current slump. Unemployment is falling, but much more slowly than it should be. Relieving people of interest cost burdens would improve the economy and help to lower unemployment.

But it is also a question of fairness. The "quantitative easing" that the Federal Reserve has thus far been engaged in has likely helped to improve the economy overall, but its actions have primarily boosted the value of financial assets mostly owned by large financial institutions and the wealthy. Conceptually there is no good reason why we all couldn't have access to cheap credit.

Senator Warren's proposal is a good one, and something she should be applauded for. But aside from the concrete benefits to students, it also highlights the fundamental inequalities in our system. It's unclear why the big banks which needed a massive bailout, institutions which should rightly be seen as risky borrowers, have access to the best interest rates available, and the rest of us do not.

In a time of full employment, and with an obviously well-functioning banking system, I would not be making such arguments. In those circumstances, inflation concerns would be real, and a well-functioning banking system would mean that their role as financial intermediaries, matching lenders to borrowers, would be a valuable one. Right now, however, giving low interest loans to the rest of us would both help to ameliorate current economic suffering of individuals and boost the economy generally. It's the boost we need. Open the discount window to us all!

Duncan Black writes the blog Eschatonunder the pseudonym of Atrios and is a fellow at Media Matters for America.

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