It should come as no surprise that politically connected banks received larger bailout loans from the federal government during the 2007 financial crisis than banks that spent less on lobbying and campaign contributions. That's the conclusion of a new analysis by Prof. Benjamin Blau of Utah State University. His findings were based on data from the Federal Reserve and published by the Mercatus Center at George Mason University.
Blau noted it was “unlikely" that the Fed intended "to provide political favors to banks with the most political connections.” But whatever the motive, the pattern was stark. Banks that received bailout loans spent 72 times more on lobbying in the decade before the meltdown than banks that got no loans. Blau also found that 15 percent of the banks that received loans employed politically connected individuals. Only 1.5 percent of banks with politically connected employees got no loans.
There are three potential reasons for the skew, as Blau indicates:
1. The Fed may simply have had more information on the politically active banks, which would have made it easier to approve the loans.
2. The politically active banks were probably more likely to seek Fed loans.
3. Because of their political sophistication, these banks may have taken greater risks believing they would be rescued by the Fed if anything went wrong.
Following the 2007 crisis, Congress passed Dodd-Frank, a massive tome of a bill that Americans were told would prevent a repeat of the financial meltdown. In fact, Dodd-Frank all but guarantees that big banks stay big and small banks struggle to compete. “Dodd-Frank has not done enough to coral ‘too big to fail’ banks and, on balance, the act has made things worse, not better,” said Richard Fisher, president of the Federal Reserve Bank of Dallas.
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