How To Succeed in Banking Without Really Trying
The Bush-Obama financial-rescue plan is premised on saving the big banks that caused the trouble. The theory is that we need to help Wall Street to help Main Street. Government would make money available, and the banks would make loans to business, which would revive the economy. “Once you assume,” Michael Lewis, author of The Big Short, told Charlie Rose, “that the creditors, shareholders and management must be made whole, you have no alternative to gifting the banks.” The “gifting” program for banks has succeeded beyond the dreams of avarice. In the first quarter, Goldman Sachs earned at least $25 million on each of 63 working days. They made more than $100 million on 35 of them. JPMorgan Chase and Bank of America also made money every single day in the first quarter. The New York Times called it the equivalent of a perfect game in baseball.
The Federal Reserve, the Treasury, and the FDIC set up 25 programs to bail out the banks, committing $23.6 trillion to the task. The biggest gift is probably the ZIRP (Zero Interest Rate Policy) program, first announced in December 2008. Tom Hoenig, president of the Federal Reserve Bank of Kansas City, reported on the April meeting of the Federal Open Market Committee (the board that sets short-term interest rates): “conditions will likely warrant keeping the fed funds rate, which is our key monetary policy tool at exceptionally low levels for ‘an extended period.’” ZIRP, to our bankers, is a license to steal. They borrow from the Fed at zero percent and loan the money back to the Treasury at 3.5 percent. The bankers call this the “carry trade.” You or I might call it “fish in a barrel.” The perfect-game analogy doesn’t fit the “carry trade”; rather, it calls to mind the 1919 Chicago White Sox. The Fed has lent out some two trillion dollars to our largest financial institution at zero or near-zero interest rates to carry on the “carry trade.” Chairman Bernanke has refused to say who received that money.
The Federal Reserve reports that, as of May 2010, the big U.S. banks have increased purchases of U.S. Treasuries by 35 percent since September 2008; cash assets (which includes cash on hand or in the process of collection as well as balances due from other banks) are up 147 percent. Commercial and industrial loans, however, including small-business loans, are down 26 percent. The Bush-Obama theory, the numbers make clear, is a failure. It failed because it was based on a misunderstanding of how our big banks are making their money these days. They no longer make loans; they are making markets in derivatives and in general running Wild West casinos. Goldman Sachs CEO Lloyd Blankfein told Charlie Rose on April 30 that derivatives served a social purpose. For example, he said, suppose you want to drill an oil well in the Gulf that will cost $100 million and will only be profitable if you can sell the oil for at least $80 a barrel. You could buy a derivative from Goldman that would guarantee you the $80 price for the next 30 years. Then, says Blankfein, you can drill your well. That may be a social purpose, but is that what bankers are supposed to be doing? How are you going to put that on an exchange?
The banks don’t disclose how much of their profit comes from the “carry trade.” What is known, as reported by Fortune, is that recent profits at big banks are largely attributable to “trading.” Business is so good that Bank of America’s chief executive, Brian T. Moynihan, declared the “worst of the credit cycle” to be “clearly behind us” and that recent economic growth is “real.” Moynihan is correct—growth is real, if you belong to the big bank club. Nearly 80 percent of industry profits came from the country’s largest banks, with the six largest raking in the lion’s share. Meanwhile, on Main Street, smaller banks continue to struggle. There have been 72 bank failures this year, and the number of “problem banks” reported by the FDIC reached 775.
The banks, despite all the gifting, are probably still bust. If they were “marked to market,” the “toxic” securities they are carrying on their balance sheets at fictitious values would have to be written down. At some point, ZIRP will end, and banks will have to start paying market rates to secure funds.
What does ZIRP do to the economy? Chronically low interest encourages borrowing and consuming over saving. It punishes savers. We are told all our lives to save money for retirement. Say a retiree has put aside $1 million expecting to earn four- or five-percent interest, giving him $40,000 or $50,000 to live on. ZIRP drives the rate down under one percent and the return under $10,000. Savers subsidize borrowers. The Fed’s theory is that if savers can’t get any return on their money they will spend it on flat-screen TVs.
“Inevitably,” says Hoenig, “the policy bias is to delay, to let accommodative conditions stand, and to reverse only when the economy is beyond recovery and into an expansion.” Thus, “While we may not know where the bubble will emerge, these conditions, left unchanged, will invite a credit boom and inevitably, a bust.”
This article first appeared in the August 2010 issue of Chronicles: A Magazine of American Culture.
Entries(RSS)
These low interest rates are singularly responsible for every economic crisis ever seen in the world.
It is all a means of using inflation to redistribute resources towards the inflaters and spenders (the government) from those with thrift and savings.
Straightforward confiscation of middle-class wealth for redistribution to financial elites and those on the dole; punishing virtue, rewarding vice. That's our government for you. Steal from the wage earner through inflation and then tax his savings the same way. Speaking of zero things, that's the chance a Republican majority, if elected in the fall, will audit the Fed. How can we vote out the bums when the media ensures that only like-minded bums can run for national office in the first place?
Anyone who says the major banks are even close to solvency is accepting the short end of a bet. I suspect that the main reason why they've set up the carry trade this way is to allow these so-called "too-big-to-fail" institutions to finesse their balance sheets to give the illusion that they are actually solvent.
I'd also be prepared to believe that the European banks are in much the same shape.
The ONLY reason I can think of why the various governments are conniving at this is to keep the news of these mass insolvencies from getting out and totally collapsing confidence in the "system". Given what we know about the banks, and the unfunded liabilities ($ 130 TRILLION in the US alone) of the governments they are colluding with, we can say one thing for certain: ALL the former "Western" governments are broke. As is the entire system that keeps them in existence.
Dead broke, save that no one has the guts to say so in public.
The collapse of a banking system is not a bad thing. Andrew Jackson knew that.
Credit transactions are meant to be handled by financial institutions, not banks. Fixed deposits are the proper source of lending, not demand deposits. Banks are strictly for accepting deposits and transferring funds; they are not credit transactors.
In order to ensure that such a self-destructive system survives for a little longer, banks are loaned up to their maximum from the central bank, from which they can keep lending further. The government allows them the benefit of suspension of specie payments, and disallows depositors to dispossess bank property when banks default on their property.
If the central bank and the government succeeds, you had to fork the bill, and if it does something wrong, you have to fork the bill. When it collapses and is unable to impose the inflation tax on you, you'd only be better for it(a brief period of panic notwithstanding). That's what happened when Jackson refused to renew his charter with Bank of United States.
#4 You understand less than nothing about Andrew Jackson and his disastrous and misguided interference in the money supply. He did not destroy the banking saystem. He destroyed the BUS and empowered a host of wildcat banks that created the boom that busted in 1837. He did not create a hard money system, though he alleged that was what he intended.
If I am wrong, I am wrong.
Confirmation bias is something of which even good analysts can be guilty, and historical analysis is prone to too many assumptions about causes and effects between very complex events. So I'll approach the matter with some humility.
All I know is that the confidence of a wildcat bank is greatly increased under these circumstances:
1. The state will guarantee a suspension of specie payments when depositors rush in to get their money, so the banks can squander as much money as they can before that without getting into trouble afterwards.
2. Not allowing foreign currency to circulate means that the local legal tender can be debased as far as possible, and thus reward banks at the expense of savers.
Suspension of specie payments existed before 1837, and existed during 1837, and we can be somewhat sure that at least some wildcat in New England felt certain that he could get away, because his friends in the government would help him. It isn't the lone factor, but probably one among many.
There is no such thing as a free market in banking, nor should there be. But too often, keepers of law-and-order shelter businesses when they should punish them, and punish businesses when they should leave them alone.
President Abraham Lincoln warned about this, and this following quote is what I believe was what got him assassinated:
"I see in the near future a crisis approaching that unnerves me and causes me to tremble for the safety of my country. . . . corporations have been enthroned and an era of corruption in high places will follow, and the money power of the country will endeavor to prolong its reign by working upon the prejudices of the people until all wealth is aggregated in a few hands and the Republic is destroyed."
Wait a second - Lincoln, tool of big banking and big business, warning about the future crisis he helped to create. Irony.
"Corporations have been enthroned"? Really?
General Motors, once thought to have all power with its 50% market share, was still not strong enough to bear the onslaught of later competitors and saw its market share plummett to 25%. All of this was despite all the help GM could get from government. A&P Grocery Chain, the Wal-Mart of its time, is the only American corporation that could ever qualify as a long-term monopoly, but even that couldn't face the first new batch of competitors in the 1960s, saw its first losses in 1970, and was completely finished within two years after. Intel had a 90% market share before AMD released a superior product - bringing its market share down to 85%. A 5% loss of market share resulted in very high losses in the income statements, and one-tenth of the company being laid off.
Businesses have no power. They are the mercy of an environment far more complicated than they can understand or handle. No amount of government cronyism, patents, or any unfair advantage can save them. They just merely managed to adapt and survive for as long as possible before they get wiped out like everybody else. Even giants like Apple or Toyota run under the fear that they won't make it through the next quarter.
There is no such thing as "concentration of wealth" in any First World nation, let alone America, because in the United States nobody who is in the bottom 25% of an income range will still be there five years later (US government's own statistics), and everybody in the bottom 25% of income range ends up placed in the top 25% range within 15 years (again, US government's own statistics). Income has to do with age, but even so, in the US the top-most 25% has a median income only 30% higher than the median income of the bottom-most 25%.
But what do these simple practical facts of buying, selling, and earning compare to the conspiracist paranoid ramblings of a corrupt, mass-murdering former President of United States? Or such similar statements made by right-wing and left-wing online conspiracy theorists?
Mr. Sanjay, where in the heck do the figures in the second to last paragraph come from? Frankly speaking, they sound as bogus as the claim that there exists no concentration in wealth. Though if they trully do originate with government bureacracies then the application of the word "bogus" might well be all that needs to be said.
As to your criticisms preceding those figures: substitute the word "banks" or "big banking" or even "New York banks" for "corporations" and see if doesn't make more sense.
GM was a behemoth in many respects, but the wealth created by GM benefitted not only executives (though far more modestly than say banking execs benefit from their enterprises) but also a great many in this thing once known as a middle class, particularly as found in heartland America. That GM's demise matters little to libertarians and bankers does not mean that concentrated wealth in the hands of bankers did not contribute to the destruction of such an enterprise.
I have seen the figures in various economics textbooks, many of which sourced back to a report by Federal Reserve Bank of Dallas. I just repeated from memory.
I think this one must be the report, but I have not read or checked it: http://www.dallasfed.org/fed/annual/1999p/ar95.cfm
"Concentration of wealth" is a zero-sum idea, which assumes that a man gets rich only by taking money from poor people. That still doesn't explain why a rich nation like United States has more billionaires than any poor nation! It also doesn't explain why being poor in America means having more living space than a rich Frenchman or German, more rooms per person than a Frenchman or a German, a garage, multiple bathrooms, an owned house, a car, an air conditioner, a savings account, a colour television, DVD players, satellite reception, and various other luxuries. This was from a well publicized research by Robert Recter recently. Talks of disappearing middle class is done by people who don't understand statistical data, especially since in their assumptions shifts in the normal distribution are unaccompanied by shifts in the previous range forward towards the center (this will only show a disappearing middle class for any country in the world)
I am saying this as a Third Worlder, but I feel irritated listening to people in rich countries talk about how their poor are getting poorer or how their middle class is disappearing. It's simply because they have absolutely no idea how good they have things, and how people with a wide range of luxuries - even expensive game consoles - are called poor. I seriously don't think Americans (or Canadians or Europeans) have seen genuine poverty like I do around here. And I don't think Americans themselves realise what it once used to mean to be actually poor in their own countries back in the 1920s.
Mr. Sanjay, none of this means there does not exist a concentration or even increasing concentration of wealth. Neither does it mean that because so many had it so good in the past that they or their progeny will not have it worse. This seems to be the course set for Americans: widening gaps in wealth and widening standards of living. Now, of course, this may not mean that those at the bottom will have it worse than their predecessors did with actually declining standards. It could theoretically mean the standards at the top rungs increase while the lower ones remain static. But it may mean actual declines.
With the government not at all inclined toward a national industrial policy (which the likes of Bill Ford and Andy Grove are even suggesting we should have) nor toward a more responsible management of the public debt coupled with massive immigration (legal and illegal), we are likely to see declining standards for a good portion of the population at some point. It looks like it will not be gradual but probably a precipitous drop when the "bottom falls out". This could prove disastrous.
No industrial policy and no major new entrepreneurially-driven emeregence of the next new thing coupled with productivity gains and international labor arbitrage will mean the decline in well-paying, skilled jobs. The central bank's "managing" of the debt that neither the so-called conservatives or progressives wish to reduce will mean inflation and the decline in wealth and standards for especially those toward the lower rungs.
Eventually the hand-outs that support idleness at the lowest rungs for those who've "given up" and spend their days in front of a game console will, under the aforementioned scenarios, have to come to an end. Likewise, for those some rungs up who are industrious but for whom the job market does not match up to their skill sets or ambitions, will face declined standards of life. The ones at the top rungs - manageerial elites - will have it good or better. For a while. Only for a while because those elites are dependent - economically and culturally - on a middle class society and not oligarchies of the sort that can persist in third world countries. The trully rich who might be able to live under those conditions are (have been for a century?) an increasingly rare strata.
That is why we - nearly all of us Americans - should be wringing our hands over the "decline of the middle class".