Bailout Boomerang

Taxpayer money pouring into banks has not only failed to get loans flowing but even worsened the practices of those that received it.

"The federal government," the Washington Post reports, "has invested almost $200 billion in U.S. banks over the last three months to spark new lending to consumers and businesses.

"So far, it hasn't worked. Lending has declined, and banks that got government money on average have reduced lending more sharply than banks that didn't."

In the Paulson free-money giveaway, recipients have used government funds to merge with weaker institutions, increase reserves and improve their balance sheets.

But the total volume of loans outstanding from all banks fell about 1 percent, according to Federal Reserve data, declining more than twice as much among those that accepted taxpayer money. Some of the first to get funding, such as Citigroup and J.P. Morgan Chase, have reported the sharpest drops.

An irony that emerges is that depositors are shying away from big banks seen to be in bad shape and, encouraged by the increase in FDIC protection, putting money into weaker institutions that offer higher interest rates.

In the face of this bailout boomerang, members of Congress from both parties are now looking for ways to pressure recipients into making more loans, starting with more closely tracking how banks use the money they get.

Barney Frank, chairman of the House Financial Services Committee, expects the Obama Administration to pressure banks harder to increase lending, saying the initial bailout should have come with tougher conditions. He plans to hold hearings this week to push the effort.

This dispiriting picture raises larger questions about the "too big to fail" premise of the bailouts. So far results based on that assumption with a hands-off approach by the government have not been encouraging.

Wall Street Gets Obama's Message

It was a tale of two cities today with joy in Washington and despair in the financial markets of New York. When George W. Bush left the White House, he took Wall Street's free-lunch order forms with him and the panic is on.

The Dow lost 4 percent, the Nasdaq and Standard & Poor's 500 index more than 5 as Bank of America, J.P. Morgan Chase and Citigroup fell to new lows.

While Barack Obama was saying “Without a watchful eye, the market can spin out of control,” Wall Street was doing just that in expectation that the Henry Paulson billion-dollar giveaways would now be transformed with conditions, oversight and transparency.

With bank bailouts on the brink of being controlled by the firmer hand of an Obama Administration, shareholders are bailing out of institutions that flourished in the greed-is-good era and now are failing, shrinking or merging.

In this new climate, "too big to fail" may be an idea whose time has passed, to be replaced by smaller entities that can really work in a competitive free market.

How to get from here to there without falling in a financial abyss is the challenge for both government and the private sector. The new people in Washington had better be up to it.