FacebookTwitterGoogle+RedditEmail

Bank Profits Are Up

Most of us work for a living; the rest are bankers. These days the news is filled with great tales about how the banks are coming back.

Even that giant corpse Citigroup is showing signs of life. Its stock is now selling for more than five times the lows hit earlier this year. Its market capitalization is up near $57 billion, a bit more than the $45 billion that the government lent them through the TARP. Some are even expecting that the government will make a profit on its Citigroup investment.

These hopes are probably somewhat premature. Citigroup still has many bad assets on its books which it has not yet written down. Furthermore, the government is directly on the hook for $300 billion of these bad assets, having offered a guarantee as part of its December Citigroup Rescue Special.

In this case, Citigroup may be able to prevent losses and boost the value of its government-owned stock because the government is picking up its bad debts. This is a case of money going into one pocket but out of the other one; that’s not the way that most investors make money.

In fact, much of the story of the return of bank profitability has this character of money in one pocket and out the other pocket. To make the story as simple as possible, banks can now borrow money short-term at near zero cost from the Federal Reserve Board. The Fed has pushed rates to near zero in order to boost the economy. On the other side, banks can buy up U.S. government bonds that are currently paying around 3.5 percent interest.

This means that we lend the banks the money that they lend back to us, albeit at a considerably higher interest rate. To take round numbers, let’s say that the banks have borrowed $1 trillion from the Fed’s various lending facilities. (The Fed’s total loans are now over $2 trillion.) Suppose they pay an average interest rate of 0.2 percent on this money. If the banks then buy up government bonds that pay a 3.5 percent interest rate, they can pocket the difference of 3.3 percentage points. On a trillion dollars of lending, this will give the banks $33 billion a year in net interest or profit. This is the extra money that the government is paying the banks to borrow back the money that it lent them through the Fed.

Of course this is not the whole story of the banks’ return to profitability. We also have the shrewd traders like the Goldman Sachs crew. They take the money that they borrowed, either directly from the government or with the government’s guarantee, and use it to speculate in items like oil and other commodities.

These folks are betting that they can outguess the markets. For example, the Goldman boys might catch oil on the way up, so that consumers pay higher gas prices somewhat sooner to cover Goldman’s trading profits. Alternatively, they might short a commodity like oil. This will cause the price to drop more quickly than would otherwise be the case, leaving producers with somewhat less money than if Goldman hadn’t stepped into the market.

In either case, Goldman’s gains come at the expense of other actors in the market. There is not anything necessarily wrong with speculation; informed speculation can provide useful information to the markets. However, in this case the taxpayers are financing it, and taking the risk if it goes bad.

It turned out Goldman’s bets were winners in the second quarter, so this means that the taxpayers paid for Goldman’s profits with the higher gap between the prices paid by gasoline buyers and other consumers and the money received by oil companies and other producers. Of course, if Goldman’s bets had gone badly, taxpayers would have been forced to cough up the money to make up the losses directly through the Treasury. Either way, the taxpayers get to pay.

That is the basic story of the banking industry. These folks have the system set up so that they should be able to make money pretty much regardless of what happens, with the risk of bad outcomes all placed on the taxpayers.

Many people are outraged that the banks intend to pay their top executives large bonuses. But these unthinking populists simply don’t recognize these people’s extraordinary talent. After all, it is not everyone who can get the government to subsidize them to the tune of several billion dollars a year. These people may not fare very well in a market economy, but these bank executives get huge rewards in an economy like the one we have in the United States.

DEAN BAKER is the co-director of the Center for Economic and Policy Research (CEPR). He is the author of Plunder and Blunder: The Rise and Fall of the Bubble Economy.

 

 

 

 

 

 

 

More articles by:

Dean Baker is the senior economist at the Center for Economic and Policy Research in Washington, DC. 

December 11, 2018
Eric Draitser
AFRICOM: A Neocolonial Occupation Force?
Sheldon Richman
War Over Ukraine?
Louis Proyect
Why World War II, Not the New Deal, Ended the Great Depression
Howard Lisnoff
Police Violence and Mass Policing in the U.S.
Mark Ashwill
A “Patriotic” Education Study Abroad Program in Viet Nam: God Bless America, Right or Wrong!
Laura Flanders
HUD Official to Move into Public Housing?
Nino Pagliccia
Resistance is Not Terrorism
Matthew Johnson
See No Evil, See No Good: The Truth Is Not Black and White
Maria Paez Victor
How Reuters Slandered Venezuela’s Social Benefits Card
December 10, 2018
Jacques R. Pauwels
Foreign Interventions in Revolutionary Russia
Richard Klin
The Disasters of War
Katie Fite
Rebranding Bundy
Gary Olson
A Few Thoughts on Politics and Personal Identity
Patrick Cockburn
Brexit Britain’s Crisis of Self-Confidence Will Only End in Tears and Rising Nationalism
Andrew Moss
Undocumented Citizen
Dean Baker
Trump and China: Going With Patent Holders Against Workers
Lawrence Wittner
Reviving the Nuclear Disarmament Movement: a Practical Proposal
Dan Siegel
Thoughts on the 2018 Elections and Beyond
Thomas Knapp
Election 2020: I Can Smell the Dumpster Fires Already
Weekend Edition
December 07, 2018
Friday - Sunday
Steve Hendricks
What If We Just Buy Off Big Fossil Fuel? A Novel Plan to Mitigate the Climate Calamity
Jeffrey St. Clair
Cancer as Weapon: Poppy Bush’s Radioactive War on Iraq
Paul Street
The McCain and Bush Death Tours: Establishment Rituals in How to be a Proper Ruler
Jason Hirthler
Laws of the Jungle: The Free Market and the Continuity of Change
Ajamu Baraka
The Universal Declaration of Human Rights at 70: Time to De-Colonize Human Rights!
Andrew Levine
Thoughts on Strategy for a Left Opposition
Jennifer Matsui
Dead of Night Redux: A Zombie Rises, A Spook Falls
Rob Urie
Degrowth: Toward a Green Revolution
Binoy Kampmark
The Bomb that Did Not Detonate: Julian Assange, Manafort and The Guardian
Robert Hunziker
The Deathly Insect Dilemma
Robert Fisk
Spare Me the American Tears for the Murder of Jamal Khashoggi
Joseph Natoli
Tribal Justice
Ron Jacobs
Getting Pushed Off the Capitalist Cliff
Macdonald Stainsby
Unist’ot’en Camp is Under Threat in Northern Canada
Senator Tom Harkin
Questions for Vice-President Bush on Posada Carriles
W. T. Whitney
Two Years and Colombia’s Peace Agreement is in Shreds
Ron Jacobs
Getting Pushed Off the Capitalist Cliff
Ramzy Baroud
The Conspiracy Against Refugees
David Rosen
The Swamp Stinks: Trump & Washington’s Rot
Raouf Halaby
Wall-to-Wall Whitewashing
Daniel Falcone
Noam Chomsky Turns 90
Dean Baker
An Inverted Bond Yield Curve: Is a Recession Coming?
Nick Pemberton
The Case For Chuck Mertz (Not Noam Chomsky) as America’s Leading Intellectual
Ralph Nader
New Book about Ethics and Whistleblowing for Engineers Affects Us All!
Dan Kovalik
The Return of the Nicaraguan Contras, and the Rise of the Pro-Contra Left
Jeremy Kuzmarov
Exposing the Crimes of the CIAs Fair-Haired Boy, Paul Kagame, and the Rwandan Patriotic Front
FacebookTwitterGoogle+RedditEmail