Subsidized profits

Currently writing a book about the financial crisis, David Stockman, director of the Office of Management and Budget under President Ronald Reagan published today on the NY Times a surprisingly tough attack on the nation’s largest financial institutions as well as on the actions of the Federal Reserve to save them and its current monetary policy.

For Stockman, the Fed’s purchase of $1.5 trillion of Treasury bonds and other securities held by these banks bringing short-term interests rates to near zero is a ‘vast and capricious reallocation of national income’ in which ‘the savers of America are taking a $250 billion annual haircut in lost interest income’ (bringing down the banks cost of production) while rates on bank loans have not came down accordingly.

The result has a been a steeply sloped yield curve which has allowed financial institutions to report record profits that represented ‘the fruits of hyperactive gambling in the Fed’s monetary casino – a place where the inside players obtain their chips at no cost from the Fed-controlled money markets, and are warned well in advance, by obscure wording changes in the Fed’s policy statements, about any pending shift in the gambling odds.

While reality is vastly more complex, Stockman argument is useful in making clearer the extent to which behind the banks results there is a huge public subsidy which is being provided at the expense of the ordinary saver and taxpayer.

Warren Buffet might not see a rationale for bank fees, but if that subsidy is going to end up as bonuses, it seems only fair that part of it should recouped by the government in the form of a tax on the nations’ largest financial institutions.