Bloomberg says our big banks essentially are insolvent parasites that exist solely due to government bailouts. The Too Big Too Fail banks receive huge implicit subsidies since they can borrow from the government at lower rates, because if they failed it would be catastrophic. In other words, our government is saying, the more risky the bank is, the lower the rate they can borrow money at – the exact opposite of what should be happening. Without suchÂ subsidies the big banks would be insolvent.
If we had actual capitalism these banks would have been allowed to fail. But the Geithner Doctrine, backed by Obama, insist they receive huge amounts of bailout money and that any financial wrongdoings never be criminally prosecuted. If this happened in a Third World country we would laugh about how corrupt they are.
Why should taxpayers give big banks $83 billion a year?
What if we told you that, by our calculations, the largest U.S. banks aren’t really profitable at all? What if the billions of dollars they allegedly earn for their shareholders were almost entirely a gift from U.S. taxpayers?
Banks have a powerful incentive to get big and unwieldy. The larger they are, the more disastrous their failure would be and the more certain they can be of a government bailout in an emergency. The result is an implicit subsidy: The banks that are potentially the most dangerous can borrow at lower rates, because creditors perceive them as too big to fail.
Remember that $83 billion bank subsidy? We weren’t kidding
How did we get there? To recap, the largest banks can borrow money at a lower rate because creditors assume the government, on behalf of taxpayers, will rescue them in an emergency. In a 2012 study, two economists — Kenichi Ueda of the International Monetary Fund and Beatrice Weder di Mauro of the University of Mainz — estimated the value of that too-big-to-fail subsidy at about 0.8 percentage point. We multiplied that number by the top 10 U.S. banks’ total liabilities to come up with $83 billion a year.
Banks get a very big subsidy from taxpayers. This subsidy distorts markets and encourages banks to become a threat to the economy.
Our economy will not recover until the federal government, which really appears captiv e to the financial industry, stops bailing our insolvent, corrupt big banks.