Big Banks Claim Reform Will Hurt the Economy

Jun 2014
11,878
4,380
United States
#1
Here's Why That's Bullsh*t.
If we don't fix this house of cards, it will fall on us again.


Big Banks Claim Reform Will Hurt the Economy. Here's Why That's Bullsh*t. | Alternet

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Now, banks naturally have some debt, like deposits. But they don’t feel indebted even when they rely on 95 percent debt to finance their assets. No other healthy company lives like that, and nobody, even banks, needs to live like that — that’s the key. Normally, the market would not allow this to go on; those who are as heavily indebted feel the burden in many ways. The terms of the debt become too burdensome for corporations, and reflect the inefficient investment decisions made by heavily indebted companies. But banks have much nicer creditors, like depositors, and with many explicit and implicit guarantees, banks don’t face trouble or harsh terms. They only have to convince the regulators to let them get away with it. And they do.

So the abnormality of this incredible indebtedness is that they get away with it. There’s nothing good about it for society. If they had more equity then they could do everything that they do better —more consistently, more reliably, in a less distorted fashion.

Today's credit market is distorted. A key reason is that bankers love the high risk and chase returns. They are less fond of some of the lending where they are needed the most — like business lending, for example. Instead, most people get many credit cards in the mail and too many people live on expensive revolving credit. Effectively, the poor may end up subsidizing the credit card of the person who pays on time and has zero interest (and we all end up paying the enormous fees merchants are charged). So we can have too much or too little lending and live through inefficient booms and busts. Part of the reason for that is that banks are continually living on the edge in a way that nobody else in the economy would, and regulations meant to correct it are insufficient and flawed in their design.

LP: Banking has been a very profitable business. Is it profitable because the risks are born by the taxpayer? Do you think the bank bonus system is part of the problem?

AA: Yes, banking is partly profitable because of subsidies from taxpayers. There are probably other reasons, and not all of them good ones, in terms of the way competition works and other things. The bonus system encourages recklessness, and recklessness increases the value of the subsidies from taxpayers. Bankers are effectively paid to gamble.

. . .
They do need reformed.
 
Likes: 1 person
Apr 2015
1,711
1,985
Stockport. UK
#2
For course it will hurt the economy, their economy.
It will reduce the amount they can rip off the rest of us, therefore reducing their bonuses.
 
Likes: 3 people
Apr 2013
35,420
24,036
Left coast
#3
For course it will hurt the economy, their economy.
It will reduce the amount they can rip off the rest of us, therefore reducing their bonuses.
You haven't figured out US economics yet. Government taxes and executive bonuses are always the last things cut. All the factories could be shuttered and the last worker laid off but those exec bonuses would still keep rolling in.

That losing companies still give their executives a bonus is a total joke, IMO. A bonus is supposed to be a reward for excellence but has now become that element of RW revulsion, a participation award.

(I share that revulsion.)
 
Likes: 1 person
Jun 2014
11,878
4,380
United States
#4
You haven't figured out US economics yet. Government taxes and executive bonuses are always the last things cut. All the factories could be shuttered and the last worker laid off but those exec bonuses would still keep rolling in.

That losing companies still give their executives a bonus is a total joke, IMO. A bonus is supposed to be a reward for excellence but has now become that element of RW revulsion, a participation award.

(I share that revulsion.)
I think he was being sarcastic.
 
Mar 2013
8,969
9,695
Middle Tennessee
#8
The DOE loan program is one such area. Had the government collected even a portion of the interest generated by the loans it guaranteed, the whole program would have returned a substantial profit, even with the losses related to Sylondra and the small number of other companies that defaulted. The banks make ALL the profit, while the government take ALL the losses.

It is similar for Fannie and Freddie. They do collect the interest on the loans, but they didn't actually write any of the loans. They buy up the loans once they've been written. Essentially "guaranteeing" the banks will suffer no losses. The banks had zero concern over whether or not you can actually make the loan payments. Their asses were covered. Once again the banks make thousands of dollars in fees on each loan but carry none of the risk.

Even when the banks and mortgage companies did keep their loans, once the economy tanked I never understood the rush to buy up those "toxic" loans ??? These were loans on houses. REAL property. Even if the current owner defaulted, the bank still owned the house. It's not like that property just vanished into thin air. Sooner or later the market would recover and the house would regain it's value. Yet millions of average people lost their homes, while banks were made whole by the government. Wouldn't it have been far more effective to bail out the home owners ?? That would have done far more the stabilize the market. The reason home values crashed was because so many were defaulting at the same time, effectively flooding the market with houses. Keeping owners in their homes would have limited the nose dive property values took while protecting both home owners and the banks. The root problem was that owners couldn't refinance their homes because they were worth less (in some cases far less) than their original loans. Keeping them in those houses would have largely mitigated the crash.

Floods do more damage to homes than ALL other categories COMBINED. WHY is the ONLY flood insurance available, from the federal government ??

In 2004 five banks met with the chairman of the SEC in a quiet little meeting held in a basement conference room. These five banks said they were "too big to fail" and asked the SEC to exempt them from the usual liquidity rules for investment banks. The rule was for every $12 in debt they were carrying, they had to have $1 in cash. These banks wanted to invest (more than they already had) in the mortgage backed securities !!! When the economy tanked, Lehman Brothers was carrying $30 in debt for each $1 on hand.

Of course, one of those men attending that meeting was Henry Paulson Jr. the CEO of Goldman Sachs. Later, once the whole house of cards came crashing down, he would be named as SECRETARY of the TREASURY !!!! Noooooo conflict of interest there !!!!!!

Of course ALL of this was started by Citi Bank. They merged with Travelers Insurance in 1994. This put them in violation of the Glass Steagal act of 1933, which stipulated the investment banks, mortgage companies, traditional banks and insurance companies were to be totally separate entities. What Citi wanted was one stop shopping for their customers. Walk into any branch and open a checking account, a stock account, get a mortgage for your new home and buy insurance for it and your cars, all in one place.

So they did what any good corporation does these days. They bought, err I mean, lobbied congress and got the law repealed.
 
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