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3/5/10

The Financial Market Swindle Continues: Banks' Record Profits Are a Political Matter - by Thomas Piketty

The profits of the ten largest European banks approached 50 billion euros in 2009. When we add in the ten biggest American banks, total profits reach 100 billion euros. Where do these profits come from, when the entire region was in recession in 2009? The most obvious explanation is that, during the crisis, central banks lent banks money at very low interest rates, money the banks used to lend on at higher rates to other actors: households, companies and, most especially, governments.

Let's attempt a small calculation, approximate and imperfect, but that at least has the merit of illustrating the magnitude of the sums in play. Between September and December 2008, the European Central Bank (ECB) and the American Federal Reserve (Fed) created close to two trillion euros of new money (close to ten percent of American and European GDP). This money was loaned to banks at rates of around one percent, for three to six month periods. The loans were more or less renewed throughout 2009: the February 2010 balance sheets of the ECB and the Fed are barely reduced from the record levels achieved at the beginning of 2009. Let's suppose that these 2 trillion euros loaned to the banks brought in an average return of 5 percent, either because they loaned the money at 5 percent to other actors or because that allowed them to reimburse debts that would have cost them 5 percent - which amounts to the same thing. The gross margin realized would be 80 billion euros (4 percent of 2,000), or the equivalent of 80 percent of the profits earned by the banks in 2009. Even allowing for a lesser margin, this would explain a good part of the total profits.

As long as governments now succeed in imposing strict financial regulations allowing the repetition of similar disasters to be avoided, succeed in demanding an accounting (and taxes) from banks ... and, incidentally, succeed in getting rid of the debt they've contracted with the banks.

In the absence of which citizens are likely to quite logically conclude that this whole sequence is an economic absurdity: bank profits and bonuses take off, jobs and salaries remain at half-mast and now we have to tighten our belts to repay public debt, itself created to soak up the bankers financial follies ... bankers who, moreover, have returned to speculating, this time at the expense of governments, with interest rates of close to 6 percent imposed on Irish and Greek taxpayers. Greek taxpayers, who, moreover, have unknowingly paid 300 million euros in fees to Goldman Sachs for dressing up their own public accounts.

For more: Banks' Record Profits Are a Political Matter | NewsClick

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