Wednesday, January 27, 2010

Banks and their responsibilities

Obama indicated that there should be a tax on the banks that benefited from the TARP program after the whole public outcry when it was announced that the employees would be receiving huge bonuses. This might not be a popular post for bankers since a lot of them have indicated that the help was paid back with interest and that they did not need the money in the first place. However, the country could not afford another collapse of another financial institution, especially after the falls of Bear Stearns and Lehman Brothers.

Obama in providing this TARP bailout (with minimal interest) to the banks was an attempt to trigger the U.S. economy. He was hoping for the banks to provide loans to smaller businesses and resuscitate the job market, creating a trickle down effect. In turn though, the banks took this money and loaned it to other big businesses who then repaid off their other loans which were at higher interest rate and gave it right back to the banks. The banks earned the difference in interest and not wanting to be restrained by the terms from TARP, paid it back to the government. Consequently, they earned the differences in the interest rates and it was a win-win situation for the banks and the big businesses who are able to show off their pretty financial statements now.

Who are the losers? Everyone else and small businesses who are unable to get any financing. What Obama said during the State of the Union address has some reasoning though and was very direct. Banks should help out the country if they are able to offer big bonuses. Let's hope that the banks do not get creative and start transferring their profits to other countries with lower tax rates in order to make their financial statements prettier. Some may say this looks like communism in the making but maybe in this economic recession, we all need to band together to help each other and improve the state of the country.

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