The New York Times explains why allowing institutions that do very little actual banking to call themselves banks so they can qualify for the federal bailout is a pretty bad idea:
[O]r taxpayers, the Fed’s move looks risky. The central bank has already strayed outside its strict regulatory mandate with its $150 billion rescue of the American International Group, the insurer. Losses in A.I.G.’s huge finance business made the rescue seem necessary.
The merits of extending support to a credit card company, which poses no systemic risk but has been reporting steady deterioration in its credit portfolio for more than a year, are less clear. The move may also embolden other types of financial institutions to seek the Fed’s shelter.
Granted, the contraction of consumer credit is squeezing the American economy. So the Fed’s move may be worthwhile if it helps to maintain lending by AmEx.
That’s not a sure thing.
Banks have been sitting on the money given to them by the Treasury, or used it for acquisitions. If the Fed allows AmEx and others to do the same, while still exposing taxpayers to consumer credit, the danger posed by its mission creep will be clear.
It really is starting to seem like we’re just reshuffling the deck chairs on the Titanic.
