Posted on 01/29/2012 10:14:07 AM PST by Razzz42
[T]he number one question pouring in is about the banks and their profit margin. Yes, the bottom line remains that the cost of money declines sharply for depositors while the cost of borrowing rises. Where the value of cash for three years is 0.7% to a depositor, for a fully collateralized borrower, the cost is about 4%. This is a profit margin for the banks of 571%. In other words, when the discount rate was 17% in 1981, this would have been the equivalent of a prime rate at 9707%. The profit margin at banks has NEVER been so high. The Fed has increased the profit margins of banks but they in turn are not accommodating the economy. They require more stringent collateral today than at any time in the past and want ZERO risk failing to stimulate anything. Have a brokerage account? Ask the broker how much he will lend you against fully collateralized shares. You will quickly see that the profit margins are EXTRAORDINARILY high for no risk at all! This is becoming a giant shell game whereby everyone THINKS the objective is to “stimulate” the economy, but in reality, it is bailing out the banks once again covertly by allowing their profit margins to increase dramatically. Therefore, lower interest rates only widen the spreads increasing profits to the banks while the economy fails to expand significantly. It has not led to a borrowing boom in the slightest – essential for inflation.
The Fed is covertly still bailing out the banks because they cannot foreclose on a lot of properties when they were pooled, sliced, and diced lacking a single institution to come up with a certified mortgage. So the banks are STILL being bailed out through the back door. So everyone is wondering where the inflation is, yet QE1 & QE2 failed to do much of anything. Congress is even blind to what the Fed is doing. Everything is not exactly what it seems. Even the economic growth at 2.8% for 2011 is highly dubious. If businesses increase their inventory holding because they were unable to sell their products, GDP shows this as expansion because the business bought the inventory, forget selling it. Welcome to Wonderland Alice! You can check-in, but you cannot check-out until you find the way out of this maze.
Bernanke is killing people who rely on interest bearing accounts for income/retirement. He’s keeping interest rates near zero.
Why would Bernanke do this? Who benefits from his policies?
The problem is not the banks.
Their reaction, coming out of the burst housing bubble and with the additional regulatory demands on the kevel of capital they should have on their balance sheet, and with all kinds of uncertainty looking ahead in the face of the Dodd-Frank legislation, Obamacare, executive branch attacks on the producing class, executive branch attacks on the energy sector, executive branch desires to force the banks to take big haircuts on existing mortgages and on existing MBS holdings, all spell caution to the banks.
So, the Fed’s “stimulus” monetary policy is, naturally, not spilling into tons of new consumer and small business debt; its creating large “rainy day” funds in the banks.
And when will that rainy day come? When the tsnami of inflation down the road, building up by the Fed’s policies, finally spills over the Fed’s attempts to delay and control it. Then the banks big reserves won’t look as big, or “buy” as much as they do today.
The real problem is the Fed, not the banks.
My CD’s turned over at .10% a tenth of a penny per dollar.
The banks can get money from the Feds so cheap, they don’t even want depositor’s money.Depositor’s money is just a pain in the ass for them. Pretty soon they will charge you to keep it.
With inflation at a mere 4% and sure to grow it is costing a depositor 3.90% just to save money.
Anyone who at one time depended on the interest on their money to live has already been dipping into their principal and are now more than likely in a Reverse mortgage situation eating up their kids inheritance.
Blame the Feds, blame Bush, blame Obama, blame anyone you like, but when hyper-inflation hits, it’s going to make the mess we are in today look like a picnic.
Banks are investing more in government (debt) and foreign projects but far less in local loans to individuals for private projects.
This author lost me as soon as he called the “spread” between money cost and money lent as a “profit”. The “spread” historically equates to three to four percent for highly qualified borrowers. Still that.
The Fed PAYS banks interest for their cash holdings for crying out load! I say cut out the middle man and let me go directly to the Fed for money. The hell with it. I can wait while they print it off, no problem.
Big banks gain the most from Federal Reserve policy. Even though they are technically broke, the Fed continues trying to bailout big banks by charging them next to nothing for funds and banks turnaround and lend the funds at much higher interest rates, pay nothing to savers, can buy stocks for cheap (leverage), pretend RE holdings are at 2006 values on their books, etc...the government is full of ex-big banker types.
You forget about compounding interest like on loans to consumers. The spread Armstrong talks about is not simple interest loans.
TARP accounts for most of the current advantages for big banks. Remember ‘investment houses’ were magically considered ‘banks’ to help bail them out too. Any losses big banks had to absorb were allowed to be deducted from past tax years to get refunds, any bad paper was sold to the taxpayers, free money from the Fed to banks and any bank deposits on the Fed’s books gets interest and of course there is no such things as prosecuting a banker for wrong doing, the list is endless but Congress approves of and allows all these Fed actions.
Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.