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.

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