Money for nothing

Like money?

Like easy money?

No, this is not a late-night infomercial trying to scam you out of your paycheck unemployment check.

Just open a bank and the Fed will shower you with free money:

The easiest and most profitable risk-adjusted trade available for the banks is to borrow billions from the Fed — at a cost of around half a percentage point — and then to lend the money back to the U.S. Treasury at yields of around 3 percent, or higher, a moment later. The imbedded profit — of some 2.5 percentage points — is an outright and ongoing gift from American taxpayers to Wall Street.

You’re welcome.

And now for the truly obscene part. By keeping interest rates so stubbornly low — and by remaining committed to doing so — the Fed is crushing the rest of us, especially senior citizens on fixed incomes and those who have rediscovered saving in order to have some peace of mind.

For instance, despite my bank calling it a “premier platinum savings” account, I am getting a measly 0.15 percent interest rate. On my “premier platinum checking” account, the interest rate is 0.01 percent. In an essay in The Wall Street Journal recently, Charles Schwab pointed out that there is more than $7.5 trillion in American household wealth stored in short-term, interest-bearing checking, savings and CD accounts. (The average interest rate for a one-year CD is 1.3 percent.)

Our savings is another source of virtually free capital for banks to use to lend out at much higher rates.

About a year ago, I attended a finance conference at Bloomberg. Someone in the audience asked Yale economist Robert Shiller about the chasm between the low rate banks were paying the Fed to borrow and the high rate banks were demanding from borrowers. Shiller replied the spread reflected simple market equilibrium; rates were high because risk to lenders was high. Wrong answer. The Fed was giving the banking industry an incomprehensibly large gift of free money (on top of about $12.8 trillion in junk investments the Fed secretly bought from bankrupt banks for 100 cents on the dollar), and competition among lenders had declined due to further government-approved bank consolidation, even as the entire world worried about “too big to fail.”

The financial crisis may have waned, but borrowers, lenders and taxpayers all continue to be fleeced to enrich banks that should have been restructured by wiping out all equity holders and firing their “leaders.”

The media and government are trying to bamboozle us into believing that if the Federal Government recoups its $700 billion in TARP payments we will have done well on our “investments.” But, for all the cash taxpayers pumped in when banks had single-digit stock prices (which were only non-zero because investors guessed — correctly — the government would rescue the banks) and the risks we bore, we should OWN the banks and be receiving as windfall profits on our investments ALL the record profits banks are currently “earning.” Taxpayers deserve all those profits. Instead, if we’re lucky, we’ll get our TARP money back while tens of billions in bank profits enrich the shareholders who should have been wiped out. Even worse, we’re paying for this bailout in all kinds of sneaky ways. TARP is but a small fraction of the inconceivably massive cost our government is forcing us to pay to bail out all these bankrupt banks. I even suspect TARP was established to focus our attention away from the more massive, hidden bank subsidies.

Posted by James on Tuesday, April 20, 2010