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Out of the three pillars that constitute President Obama's reactivation plan: increasing private consumption, stopping foreclosures, and strengthening banks -- the latter is perhaps the most crucial. After all, credit is the key to stimulating consumption, which represents almost two thirds of the whole U.S. economy.
However, lending keeps falling, despite the substantial support the government has bestowed on the banks. The amount of government support is impressive, $200 billion from the Treasury, to more than 500 banks, and more than $1 trillion in emergency loans, granted by the Federal Reserve, particularly to some of the biggest banks. To continue supporting the banks, the incoming Obama administration announced that the 19 largest -- those that have assets of more than $100 billion -- should undergo stress tests, to identify more precisely the amount of support each one of them requires. The focus on the biggest banks is justified because the banking sector is quite concentrated, with 10 biggest banks controlling 75 percent of banking assets.
Responding to demands for transparency, the government decided that it will release some results of these tests, which has generated some discomfort among banks. Some of them have announced that they will repay part of the government financial support ahead of schedule.
Because there is resistance in Congress to increase funding dedicated to supporting the banks, the New York Times recently revealed that the government may convert some of the loans granted to the banks into preferred, voting stocks. This would transform the government into the biggest stockholder in these banks, which confirms a statement made by Paul Volcker, the most experienced economic advisor to President Obama, who recently said, "we're in a government-dependent financial system; I never thought I'd see the day."
Isaac Cohen is the former director of the Washington Office of the United Nations Economic Commission for Latin America and the Caribbean (ECLAC). He is a commentator on economic and financial issues for CNN en Espanol TV and radio.
