Markets & Finance

Taxing Grandma to Subsidize Goldman Sachs


Financial wizards have managed to buy preferred treatment just as the sacrifices of American retirees help pay off Wall Street's losses

Monday afternoon, Goldman Sachs (GS) reported much larger than expected first-quarter profits on the heels of the strong earnings Wells Fargo (WFC) reported last week.

No one should be surprised.

The Federal Reserve has provided the banks with lots of cheap funds through various emergency lending facilities and quantitative easing.

The Fed has permitted the banks and financial houses to park vast sums of unmarketable paper on its books—securities made nearly worthless by the misjudgment and avarice of bankers. In return, the Fed has provided these paragons of finance with fresh, cheap funds to lend at healthy rates on credit cards, auto loans, and even mortgages.

While the Fed cuts the banks slack, the bankers are busy turning the screws on their debtors by raising credit card rates and fees, and harassing distressed borrowers with all the zeal the Roman army displayed sacking Palestine.

easy gravy in extra bank spreads

It takes good banking skills to borrow at 3%, lend at 5%, and make a profit.

It takes much less business acumen to borrow at 2%, lend at 5%, and make a profit—which is exactly what has happened. The extra fees are just gravy.

Increasing the spread for banks is akin to subsidizing parts purchases for car companies. The folks at GM (GM) would look like wizards if the Fed had been similarly generous to them.

This all comes at a cost to someone—America's elderly.

Many retirees depend on interest from certificates of deposit. Those rates are down dramatically and as CDs expire, retirees are compelled to reinvest their savings at lower rates and live on less income. They can take comfort that their sacrifices are helping pay off Wall Street's losses from the lavish bonuses that were paid bankers—for example, the $70.3 million Goldman doled out to CEO Lloyd Blankfein in 2007.

lavish welfare for failing U.S. banks

The contrast between how the banks and car companies are treated is the product of political acumen, not financial skills, at Goldman Sachs and other banks. Having fed the campaign machines of both political parties and lavished speaking fees on future White House economic advisors, these financial wizards have managed to purchase preferred treatment in our capital.

When times are good, their troops feast like a conquering Roman army. When they fail, Washington gives them welfare on the gold plates of emperors.

Now the banks, led by Goldman, want to pay back the TARP funds and free themselves of federal restrictions on compensation. After all, as private concerns, they argue that what they pay will depend on what profits they can generate.

Yet the Fed's lines of credit to banks, insurance companies, and such exceed $800 billion. Its monetary policy transfers income from retirees to the likes of Blankfein.

Isn't this a great country?

Peter Morici is a professor at the Robert H. Smith School of Business at the University of Maryland and the former chief economist at the U.S. International Trade Commission.

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