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Federal Reserve Rains Money On Corporate America -- But Main Street Left High And Dry

First Posted: 11/03/10 03:42 PM ET Updated: 05/25/11 07:10 PM ET


Outstanding commercial and industrial loans at U.S. banks have fallen from $1.6 trillion in October 2008 to $1.2 trillion this past September, Fed data show. The $390 billion drop is equivalent to a 24 percent reduction in credit to businesses.

For families, it seems that it's never been harder to get a line of credit. For banks, they book an easy profit by borrowing at near-zero cost and lending it back to Uncle Sam.

In a March interview with The Huffington Post, Hoenig said the Fed didn't "have any business guaranteeing Wall Street spreads," otherwise known as the profit generated from the difference between borrowing at low interest rates and at lending higher.

Thanks to near-zero borrowing rates, the Fed has nursed the nation's banks back to health and shored up their balance sheets.

According to the Federal Deposit Insurance Corporation, in the three-month period ending in June banks enjoyed their lowest cost of funds in the 26 years the FDIC has kept quarterly records. That cost -- the money banks pay to garner deposits and other funds that are then used to lend, invest or trade -- dropped to 0.97 percent, the first time they've paid less than one percent during a quarter since at least 1984, the bank regulator's records show.

Historical records on commercial banks' cost of funds going back to the inception of the agency in the early 1930s show that the last time banks paid less than one percent for the year was 1960.

It may be even lower for the most recent quarter, which ended Sept. 30.

But it's the biggest banks that are benefiting the most from the Fed's generosity.

Banks with more than $10 billion in assets paid just 0.85 percent for their money. The next class of banks, those with assets between $1 billion and $10 billion, paid 1.29 percent, FDIC data show.

The Fed made its Wednesday announcement at the conclusion of a two-day policy-setting meeting. Prior to the meeting, regional Fed chiefs from Minneapolis, Philadelphia, Kansas City, Dallas and Richmond were bristling at the expected announcement that the Fed will do more.

"Dumping another trillion dollars into the system now will most likely mean they will follow the same path into excess reserves, or government securities, or 'safe' asset purchases," Hoenig said Oct. 12.

In June, the Fed's policy makers forecast the unemployment rate next year to be between 8.3 and 8.7 percent. On Wednesday, it said that "progress toward its objectives has been disappointingly slow."


Shahien Nasiripour is the business reporter for The Huffington Post. You can send him an e-mail; bookmark his page; subscribe to his RSS feed; follow him on Twitter; friend him on Facebook; become a fan; and/or get e-mail alerts when he reports the latest news. He can be reached at 646-274-2455.

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