Taxing grandma to pay Goldman Sachs
By Peter Morici
Goldman Sachs' report this week of much larger than expected first-quarter
profits came hard on the heels of Wells Fargo's strong earnings. No one should
be surprised.
The US Federal Reserve has provided the banks with lots of cheap funds through
its various emergency lending facilities and quantitative easing. The Fed has
permitted the banks and financial houses to park vast sums of unmarketable
paper on its books - securities made nearly worthless by the misjudgment and
avarice of bankers. In return, the Fed has provided these scions of finance
with fresh funds, cheaply, that they may lend at healthy
rates on credit cards, auto loans and even mortgages.
While the Fed cuts the banks slack, the bankers are busy turning the screws on
their debtors by raising credit-card rates and fees, and harassing distressed
borrowers with all the zeal of the Roman army sacking Palestine. It takes good
banking skills to borrow at 3% and lend at 5% and make a profit.
It takes much less business acumen to borrow at 2% and lend at 5% and make a
profit - and that is exactly what has happened. The extra fees are just gravy.
Increasing the spread for banks is like subsidizing parts purchases for car
companies. The folks at GM would look like wizards if the Fed had been
similarly generous with them.
This all comes at a cost to someone - America's elderly.
Many retirees depend on interest from certificates of deposit (CDs). Those
rates are down dramatically, and as CDs expire retirees are compelled to
reinvest their savings at lower rates and live on less. They can take comfort
that their sacrifices are helping to pay off Wall Street's losses from the
lavish bonuses paid bankers - for example, the US$70.3 million Goldman doled to
chief executive Lloyd Blankfein in 2007.
The contrast between how the banks and car companies are treated is the product
of political acumen, not financial skills, at Goldman Sachs and other banks.
Feeding the campaign machines of both political parties and lavishing speaking
fees on future White House economic advisors, these financial wizards have
managed to purchase preferred treatment in Washington.
When times are good their troops feast like a conquering Roman army, and when
they fail, Washington gives them welfare on the gold plates of emperors.
Now the banks, led by Goldman, want to pay back funds they received under the
Troubled Assets Relief Program and free themselves of federal restrictions on
compensation. After all, as private concerns, they argue that what they pay
will depend on what profits they can generate.
Yet, the Fed's lines of credit to banks, insurance companies and the like
exceed $800 billion, and its monetary policy transfers income from retirees to
the likes of Blankfein.
Isn't this a great country?
Peter Morici is a professor at the Smith School of Business, University
of Maryland School, and the former chief economist at the US International
Trade Commission.
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