The recent quarterly earning statements of banks are another indicator of the existence of two seperate and unequal economic systems. by Gene DeNardo
(libertarian)
Wednesday, September 1, 2010
The numbers are out on the banks and the conclusion is more than obvious: if you are big, things are rosy, if you are small, times are tough.
The quarter ending in June saw net income for all banks reach $21.6 billion. 1.3% of the banking industry, those corporations with assets greater than $10 billion, was responsible for $19.9 billion of the earnings. That is, a little over one percent of the banking industry earned 93% of the take.
Of the 7,830 federally insured banks, 829 are on the FDIC's "problem" list. The FDIC deficit now stands at $20.7 billion, nearly equaling the quarterly earnings figure for all banks. The FDIC has mandated that banks prepay about $45 billion in premiums through 2012.
These are minor details, as the FDIC is fully backed by the federal government, which simply means, the money will be there although what "quality" the money will be would be determined by the final amount the Fed needs to "mine" to save the banks.
118 banks have failed this year, all of them smaller local and regional banks. "Too big to fail" does not include the banks that serve our local communities. I really doubt the fact that the 10 banks that received the most bailout money increased their lobbying efforts to $16.3 million during the first half of 2010 had anything to do with it. That would be using conspiracy reasoning and we know only nutcases think like that. Obviously, the numbers are coincidental.
The three political spending leaders were JP Morgan, Citigroup and Goldman Sachs. Do those names sound familiar? Citigroup, the largest recipient of federal bailout welfare, donated nearly $3 million to the lobbying cause. Well, at least they are giving some of the bailout money back to the government.
Local banks have to get their money from local people and in turn, they loan it back out again to locals for what are usually local projects. Dismissing the fact that taking money from one hand and passing it to the next should probably be covered by a competitive fee rather than actual profits, local banks are at the whim of the actual economy that is out there: real people attempting to do real jobs and provide value to other's in the community who are attempting to do the same. Things aren't so good for those folks.
On the other hand, if you a big enough to be closely connected to the source of money production, the Federal Reserve, you can earn your money the old fashioned way: through theft, fraud and corruption.
The monster financiers presently have the ability to access Fed overnight money at near zero interest. This is a historically low figure, but that doesn't hide the mechanics of the system. The interest rate that the big banks get is always lower due to their proximity to the source. As the money filters through the economy and reaches those smaller banks, the price necessarily goes up. Middle men always take a cut.
When the Treasury and the Federal Reserve buy "toxic" products from banks, they aren't buying the bad loans of "Dimple Creek Community Bank". They are buying bulk securities from the biggest and the badest. The little guy is left to fend for himself and sift out the bad debt. When the numbers don't add up for the little guy, there is little recourse other than liquidation.
The centralized control of money expansion and interest rates is what drives small banks to the brink in the first place. Local people over invest in response to bad monetary decision making at the federal level which in turn inflates local values. If localities were left on their own, their economic situation while it might not be described as "booming", it most certainly would be much more consistent and predictable. Local banks could then determine the proper rate that would allow enough money to come in and enough to go out.
What is taught in economics class as economy of scale is more often than not the economy of political connection. In banking, as in many of our industries, bigger is better when you have the backing of the government.
And, these giant money firms that took home 93% of all banking earnings in the last quarter don't step up when your neighbor needs money. There are there to assist if you are deemed big enough to make it worthwhile. Big profits don't come from small people.
What economy of scale boils down to is capital directed by the federal government to financial firms that are "too big to fail" who in turn finance only the largest and most centralized firms that possess vertical control over the marketplace often from the resource all the way down to the local distribution of the product.
Even JP Morgan in the late eighteen hundreds was bothered by those "pesky" local banks. It took the formation of the Federal Reserve in the same year of his death, 1913, to create a mechanism that would finally be able to squash out competition within the industry.
No financier lounging in his plush 20th floor New York office can know the pulse of the street in every small town of this vast country. What is true for centralized government is certainly true for centralized finance: the central planner cannot know what is best for all the various people and conditions that their decisions have influence and power over.
Unless of course, the centralized government and the centralized financier can work together to achieve what benefits both of them: lack of competition and high profits for the titans of the industry and an endless source of debt [and spending] for the governing body. When that is the case, the actual demand of the marketplace or what is best for the locals is of little concern.
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