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10-05-2010, 01:02 PM   #1
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Banker welfare and why we're not creating jobs

Another article that to me clearly show something's very screwed up in the US economy. And it's not just the government running defecits, it is all the debt we've piled on... But Bank Welfare, aka let's help the banks show a profit so we can create the impression of economic stability and growth. Banks borrow from the government - the tax payer - at near 0% and then lend it to the government - the tax payer - at 3% or to the tax payer directly at 14-30% or whatever... Meanwhile since they have this easy money to be had, why take the risk of lending to business?

More banker welfare to come? Short the financials right now. - The Cody Word - MarketWatch

QuoteQuote:
“The banks are still reporting earnings that are up so much in the last couple decades versus how much the overall economy has improved in the last couple decades, that these so-called recession bank earnings are still three times higher as a percentage of our GDP than they were back twenty years ago. That’s still unsustainable and as that percentage shrinks so too shall these bank stock prices.”

The most important chart you’ll ever see in regards to the banks is simply any chart that shows the banking system’s earnings as a percentage of our total economy. For for the first 200 years of our country, the banks never made more than 1% of our great nation’s GDP in profits. That’s right now at more than double that at over 2%. Even after the supposed “crisis”.
In this scenario, reducing government need to borrow would force investment in the corporate sector. Tax cuts by themselves will increase or at best keep government borrowing the same (and I'm talking about states and municipalities here also, but the federal one is the big guy here). Spending cuts by themselves, at least any that have a chance of passage, won't do it. Revenues must be raised and spending cut back more than cosmetically. These are both unpopular and the politicians voting for these will be punished by the electorate... which is why we'll have to wait till after November for anything to be even possible. I hope our elected officials will make the calculation that if what they do is right, two years later the economy will be much better, and thus their re-election chances as well.

10-05-2010, 01:36 PM   #2
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QuoteOriginally posted by Nesster Quote
Another article that to me clearly show something's very screwed up in the US economy. And it's not just the government running defecits, it is all the debt we've piled on... But Bank Welfare, aka let's help the banks show a profit so we can create the impression of economic stability and growth. Banks borrow from the government - the tax payer - at near 0% and then lend it to the government - the tax payer - at 3% or to the tax payer directly at 14-30% or whatever... Meanwhile since they have this easy money to be had, why take the risk of lending to business?

More banker welfare to come? Short the financials right now. - The Cody Word - MarketWatch



In this scenario, reducing government need to borrow would force investment in the corporate sector. Tax cuts by themselves will increase or at best keep government borrowing the same (and I'm talking about states and municipalities here also, but the federal one is the big guy here). Spending cuts by themselves, at least any that have a chance of passage, won't do it. Revenues must be raised and spending cut back more than cosmetically. These are both unpopular and the politicians voting for these will be punished by the electorate... which is why we'll have to wait till after November for anything to be even possible. I hope our elected officials will make the calculation that if what they do is right, two years later the economy will be much better, and thus their re-election chances as well.
Just a book plug........
The Great American Stickup: How Reagan Republicans and Clinton Democrats Enriched Wall Street While Mugging Main Street by Robert Scheer - Powell's Books
And another article......
http://www.huffingtonpost.com/marshall-auerback/the-real-reason-banks-are_b_670183.html

Last edited by jeffkrol; 10-05-2010 at 02:13 PM.
10-06-2010, 10:32 AM   #3
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QuoteOriginally posted by Nesster Quote
Another article that to me clearly show something's very screwed up in the US economy. And it's not just the government running defecits, it is all the debt we've piled on... But Bank Welfare, aka let's help the banks show a profit so we can create the impression of economic stability and growth. Banks borrow from the government - the tax payer - at near 0% and then lend it to the government - the tax payer - at 3% or to the tax payer directly at 14-30% or whatever... Meanwhile since they have this easy money to be had, why take the risk of lending to business?
.
Funny, I started a thread on that on another forum a year ago. My annoyance was that the government is lending money to banks at no interest, so, naturally, they aren't going to pay me any interest to use my money. This policy discourages liquid investment and savings.
10-06-2010, 10:43 AM   #4
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Just for fun

Then take your money and start a business...
Except for the law of capitalism there's no real good reason for a bank to not to drive even more capital to it by increasing rates on their own.. Certainly no ceiling on this in a real sense.... I've seen some types of incentives (ie high interest compared to the "norm") to drum in capital...

10-06-2010, 10:47 AM   #5
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World Finance = Gamblers Anonymous, cept these f&^_&$%s don't have the intelligence to recognise their addiction...
10-06-2010, 10:54 AM   #6
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QuoteOriginally posted by jeffkrol Quote
Then take your money and start a business...
Except for the law of capitalism there's no real good reason for a bank to not to drive even more capital to it by increasing rates on their own.. Certainly no ceiling on this in a real sense.... I've seen some types of incentives (ie high interest compared to the "norm") to drum in capital...
Why? Why would you want more capital for which you have to pay, when there is an almost endless supply for free? I suppose I should look into becoming a bank.
10-06-2010, 11:11 AM   #7
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GeneV neighborhood loan shark......
Actually I've had people looking for investments and I did tell them to look to lend to their neighbors...
Problem is it involves risk (not much bigger then the stock market IMHO) and work.
not to mention our psychological impediment to it.....
When rates vary from .1% to 1.29% somethings amiss...... Granted there all peanuts... Banks never get tired of collecting money.
http://www.bankaholic.com/money-market/
As much as it pains me to say this, we expect too much for no work ie high interest savings.... sort of...
Sounds funny coming from me, mr. health care/fire dept./police/social safety net/ entitlement..

Last edited by jeffkrol; 10-06-2010 at 11:21 AM.
10-06-2010, 11:23 AM   #8
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QuoteOriginally posted by jeffkrol Quote
GeneV neighborhood loan shark......
Actually I've had people looking for investments and I did tell them to look to lend to their neighbors...
Problem is it involves risk (not much bigger then the stock market IMHO) and work.
not to mention our psychological impediment to it.....
When rates vary from .1% to 1.29% somethings amiss...... Granted there all peanuts... Banks never get tired of collecting money.
Top 50 Money Market Rates & High Interest Savings Accounts
Ppp's MM but not much different then savings accts now.
It's called microlending. The tea shop in my neighborhood made a bad business move and tried to open a tea room which served food. He asked his customers for microloans to help him out of this jam and got twice what he asked for. It worked out for him, but I guess we'll see if his lenders make money.

10-06-2010, 11:31 AM   #9
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QuoteOriginally posted by Nesster Quote
Banks borrow from the government - the tax payer - at near 0% and then lend it to the government - the tax payer - at 3%
The rate at which banks can borrow from the Federal is 0.75% and the terms for that are overnight, which means the money you borrow today needs to be repaid with interest tomorrow or refinanced tomorrow at tomorrow's rate. Tomorrow's rate will probably be the same as today's rate but is not guaranteed and there are some good odds that it will increase over the next few months and it is certain that it will increase over the next few years.

The Federal Reserve Bank Discount Window & Payment System Risk Website

The rate at which the banks can lend money to the government is based on the yield curve for treasury. If you think they are getting 3% they are holding bonds with ~15 years to maturity.

U.S. Treasury - Daily Treasury Yield Curve

If this is indeed the strategy the banks are using it is about as stupid as buying a house with a credit card with a 0% introductory rate. The low rate is not going to last and when it increases they are not going to be able to refinance for the term of the bond they hold for less than the coupon on that bond.

---------- Post added 10-06-10 at 01:34 PM ----------

QuoteOriginally posted by jeffkrol Quote
GeneV neighborhood loan shark......
Actually I've had people looking for investments and I did tell them to look to lend to their neighbors...
Problem is it involves risk (not much bigger then the stock market IMHO) and work.
not to mention our psychological impediment to it.....
A big risk vs. stock market is losing friends and family that you lend to.
10-06-2010, 11:34 AM   #10
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QuoteOriginally posted by mikemike Quote
If this is indeed the strategy the banks are using it is about as stupid as buying a house with a credit card with a 0% introductory rate.
Yes, and your point is?

What have the folks running the financial sector done lately to give anyone the impression they are more forward-looking than the average household?
10-06-2010, 01:12 PM   #11
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Actually, banks / investment banks do this as a matter of course every night. Any free inventory they hold, they seek to finance overnight - or do a repo transaction, or a money market transaction, etc etc. The discount window was opened for the investment banks (i.e. investment banks had to get a bank charter) because the overnight repo/money market froze nearly completely with AIG, Bear, Lehman et al. At the time, who would you lend to?

So this is normal procedure, except they're sucking on Uncle Sam more than they used to.

The other side is problematic: now these institutions balance risk by mainly investing in Treasuries. The government intention was/is to unfreeze the credit markets and thereby allow banks to make commercial loans, underwrite bonds, and so on. That's not happening, due to risk and due to the heavy supply of Treasury notes and bonds.

The stupidity is on the part of our government who borrows from the world and finances the borrowing at a lower rate.

When the rates go up, guess what, all rates move up as well. The yield curves may change shape but as long as these remain positive banks can make money. When the private sector gets away from stuffing money in a mattress (treasuries) we'll be better off. (Note that overall corporate treasuries are stockpiling cash, and said cash is invested in safe US Treasuries...)
10-06-2010, 04:56 PM   #12
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QuoteOriginally posted by Nesster Quote
.

The stupidity is on the part of our government who borrows from the world and finances the borrowing at a lower rate.
The stupidity is lending it at lower rates with no strings attached. This is about as focused and effective as some of the tax cuts, but that is another thread.
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