The government could have forced the banks to use their bailout money for loans.
For example, unlike taxpayers in European countries – who get voting shares in return for their bailouts – the U.S. taxpayers have no say in the management of the companies they are giving their hard-earned money to.
And European bailouts included provisions protecting against excessive dividends and executive bonuses, and requiring loans to homeowners and small businesses:
“Five days before Paulson struck his deal with the banks, British Prime Minister Gordon Brown negotiated a similar bailout — only he extracted meaningful guarantees for taxpayers: voting rights at the banks, seats on their boards, 12 percent in annual dividend payments to the government, a suspension of dividend payments to shareholders, restrictions on executive bonuses, and a legal requirement that the banks lend money to homeowners and small businesses.
In sharp contrast, this is what U.S. taxpayers received: no controlling interest, no voting rights, no seats on the bank boards and just five percent in dividend payouts to the government, while shareholders continue to collect billions in dividends every quarter. What’s more, golden parachutes and bonuses already promised by the banks will still be paid out to executives — all before taxpayers are paid back.”
Now, the Fed is begging banks to put the money into new loans or bolster loss reserves, instead of paying dividends for shareholders.
But the left hand doesn’t know what the right hand is doing. For example, the Treasury Department encouraged banks to use the bailout money to buy their competitors, and has pushed through an amendment to the tax laws which rewards mergers in the banking industry.
Moreover, instead of requiring banks to deleverage, the government is reducing their cash reserve requirements so they can increase their leverage to loan money they don’t have through fractional reserve banking. See also this and this.
So while Bernanke is begging the banks to play nice with one hand, the other hand is patting the banks on the back and giving them a big wink.