In what has become almost a weekly ritual designed to brace the economy, the U.S. Treasury Department announced last week that it would infuse the U.S. banking system with a total of $250 billion.
The first $125 billion will go to nine banks with the intent of helping those institutions re-build their reserves and to jump-start lending to consumers and businesses. The other $125 billion will be made available to other banks, if they need it, for direct cash deposits.
This latest move comes in the shadows of a $700 billion rescue package of the U.S. financial system.
Included in the bank deal is the government’s acquiring ownership stakes in the banks that participate. Similar to the Wall Street legislation, executives at participating banks will receive limited compensation.
Banks have been reluctant to lend to one another, which has been a major cause of the credit markets seizing up. Treasury Secretary Henry Paulson told several major news outlets last week that he hopes banks will not sit on the cash infusions, but restart lending practices.
“The needs of our economy require that our financial institutions not take this new capital to hoard it, but to deploy it,” Paulson said in announcing the initiative.
As for how this will affect day-to-day business at Mississippi banks, state Banking Commissioner John Allison said the results would be a little less than tangible.
“I think more than anything it’s a psychological move,” Allison said.
Mississippi banks, because they did not engage in risky ventures like the purchasing of mortgage-backed securities that led to the collapse of several major investment banks, have not experienced the difficulties that have spurned unprecedented panic and caused government intervention into the economy. In an interview earlier in October, Allison said Mississippi banks have stuck to conservative methods that have allowed them to remain well capitalized.
“A lot of (the cash infusion) is about perception,” Allison said.
That is not to say some good will not come of it.
“Indirectly, I think it’ll free up some of the interbank loans,” Allison said.
The major beneficiaries, though, will be the large banking institutions that stepped out of normal banking practices and found themselves in trouble when the housing market fell flat.
The government money, officials hope, will restart the economic gears that have ground to a halt, creating a sense of panic among investors and turning the stock market into a daily free-for-all. The Dow Jones Industrial Average has gone through drastic swings the past couple weeks.
If banks use this capital the way the Treasury intends, not only the banks will benefit, Allison said.
“This is mainly for the huge money-center banks,” he said. “But beyond that, it will help the underwriting of small business accounts. The small businessman that has to make payroll and pay for his inventory will be able to stay with their bank instead of moving their money somewhere else.”
Since the first round of government intervention in late September, the debate has raged among economists and financial professionals over the merits of direct federal involvement in the U.S. economy. Some free-market proponents have admitted that the U.S. and other countries had to, at the very least, give the appearance that steps were being taken to induce an economic turnaround. Others have argued that the market, given time and patience, would correct itself.
Allison said the psychological factors that pervade a faltering economy had to be addressed.
“I would imagine this injection would get (big banks) back up to capital strength and boost confidence,” he said. “And we had to something. We had to do something to boost confidence.”
Contact MBJ staff writer Clay Chandler at clay.chandler@ msbusiness.com .