Banks have been taking money from the Fed for months. They can pledge dirty dishes and wall paper in exchange for real cash at low interest rates. The system has been hailed as the salvation of the financial system. While things could still get worse, the Fed has done everything it could.

The theory behind giving the banks that money is that they would do two things with it. The first was to strengthen their balance sheets. That has sort of worked out. The other goal was to get more liquidity into the consumer and business markets. The effect of that should be to decrease the costs of credit for the average citizen and companies that needed capital to grow.

Banks have held onto the money. They have walked away from risk. Lending means risk now. A bank which makes no loans faces no defaults. It keeps a big safe filled with crisp new Benjamins from the US government cordoned off from the real world.

The consumer products companies have been tutored at the feet of the banks. As crude prices have fallen from over $140 to $110, they have not passed much of that on to their customers. According to The New York Times, "As oil prices surged this year, manufacturers raised the prices of a lot of products — not just gasoline but lotions, toothpaste, plastics and many more items that use oil as a raw material. But now that oil costs are plunging, other prices are not following them lower."

Operations like P&G and Colgate are pretty clever. They sell many items which are hard for people to replace elsewhere. Oil costs were a good excuse for upping prices, and for some time a reasonable excuse.

What the banks and consumer products companies are doing will cause substantial damage to an already shaky economy. The man who cannot get more credit or less expensive credit has very little money. At the same time, the price he is paying for soap and bread has gone up and it not likely to come down. He faces having no access to capital and a higher cost of living. Add to that the fact that real wages have not gone up for eight years.

Banks and consumer products companies may make a tidy profit for the next quarter or two. Once they have broken the back of the poor soul who is financially pinched, profits will be harder to come by.

Douglas A. McIntyre

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