America Is Feeding the Financial Sharks

How is it possible that the five wealthiest banks in America do not make any profit, but are financed by American citizens?

Not so long ago, this very provocative question was asked by Bloomberg, one of the most highly regarded websites on finance in the United States. If one were to look only at the banks’ figures, this query would be completely inexplicable and perplexing.

It did not take much time for major American banks to shake off the crisis and start generating enormous profits again. Granted, they were heavily supported by the state — George W. Bush and Barack Obama lent them almost a trillion dollars — but the debt has been cleared much faster than anyone would have thought possible during the bleakest days of the crisis.

Obviously, the quick return of the government subsidies is not much of a consolation to millions of Americans who, unable to meet mortgage payments, were robbed of their houses by the crisis. Unlike the banks, these people did not receive financial support from anyone. This is one of the reasons why the American left-wing parties have been voicing their objections to the current system, in which the government finds that major financial institutions are too important to be allowed to go belly-up, yet does not mind the toll taken on regular people. Such complaints are incessant, even though everyone knows that if the banks had gone bankrupt in autumn of 2008, the repercussions might have been far grimmer than they actually were.

Bloomberg’s editorial team goes beyond that trite and hackneyed grumbling of the left wing, claiming that even now, at the outset of 2013, Americans are still maintaining the biggest banks. The too-big-to-fail rule, albeit unwritten and invisible, is still in force.

A Great Gift for the Great Five

It is common knowledge that every bank needs money in order to generate profits by making shrewd investments. Major American banks have broad access to funds because everyone is perfectly willing to lend them. People assume that the loan is safe — virtually guaranteed by the government on the strength of the too-big-to-fail rule.

Economists Kenichi Ueda of the International Monetary Fund and Beatrice Weder of Mainz University displayed the consequence of the above principle in numbers. It turns out that the big banks are given credit with 0.8 percent lower interest than other financial institutions.

Given that the average annual profit of the big five — JP Morgan Chase, Bank of America, Citigroup, Wells Fargo and Goldman Sachs — works out at 0.8 percent of their assets, the shocking result is clear for all to see: If we subtracted the credit advantage these banks have, they would only break even, failing to generate even a marginal profit!

Sticking to the numbers, the annual income of the banks is, on average, $64 billion a year. This sum is also how much they are given every year by Americans: not directly as money, but as informal guarantees that put the big five ahead of other financial institutions.

Cut the Sharks
or Keep On Feeding Them?

The news that the big players on Wall Street are in fact financed by the American society is appalling, but the real problem is that nobody really knows what to do about it. It seems the government will have to take some desperate action and play to the crowd in order to appease it. The grim thought that springs to mind is that this is the nature of capitalism.

A few days back, the Senate passed a symbolic, nonbinding resolution, which called for the cessation of indirect subsidies to banks with assets valued at over $500 billion. Apart from the big five, the bank Morgan Stanley also falls under that definition. The resolution was unanimously passed by 99 senators.

During a recent hearing in the Senate, Ben Bernarke, chairman of the Federal Reserve Board (the central American bank), explained that it is very difficult to properly assess the scale of the “hidden” subsidies given to big banks: “Ueda and Weder’s analysis is just one study. We do not know if it is an accurate number. I agree that the problem with the too-big-to-fail banks is really serious and we do not think it has been solved.”*

The too-big-to-fail principle is not a by-product of the latest crisis. It first came into use in 1984 in President Ronald Reagan’s attempt to save the Continental Illinois Bank, the seventh biggest bank in the U.S. at the time.

What needs to be done to abolish the rule? The left wing is ranting and raving about dividing the big banks into smaller ones; however, this possibility is pure fiction, especially given the fact that the market is becoming more and more monopolized by them. The 12 biggest banks with assets of at least $250 billion possess 69 percent of the assets of all American banks.

Minimum Wage: Increasingly Minimal

The hidden subsidies, which are provided by the society to the giants of Wall Street, cause even more controversy if we take into account that the average Joe is exploited more and more by employers.

In this year’s State of the Union Address, President Obama called for the minimum wage to be increased from $7.25 to $9. The chances of this actually happening are slim; even if it did happen, it would hardly be a consolation for the citizens.

Looking at the relationship between minimum wage and the productivity of American employees, there is one conclusion that can be drawn: For 20 years after World War II, in the “golden years of America,” minimum wage rose along with productivity; they both went up together on the chart. However, in the last 45 years there has been a wide split. Employees have become increasingly productive, while minimum wage has remained at the same level. If it had climbed since 1968 in tandem with productivity, it would work out to $16 an hour today!

Obviously, it appears that not much can be done to remedy this situation. Raising minimum wage would force companies to move abroad to exploit foreigners instead of Americans. Another grim thought regarding capitalism comes to mind: it is an atrocious system, but nobody has yet come up with a better one.

Editor’s Note: This quote, accurately translated, cannot be verified.