Wednesday, June 20, 2012

Bloomberg News: How the US Government spends more subsidizing banks than on education

When JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon testifies in the U.S. House today, he will present himself as a champion of free-market capitalism in opposition to an overweening government. His position would be more convincing if his bank weren’t such a beneficiary of corporate welfare.

To be precise, JPMorgan receives a government subsidy worth about $14 billion a year, according to research published by the International Monetary Fund and our own analysis of bank balance sheets. ...

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  1. Good article by Bloomberg – makes a lot of sense. Some banks seem to have learnt no lesson at all from the last bailout except that they can rely on friendly politicians to ensure their solvency and bonuses and do so without daring to regulate and with no strings attached. It does seem that unless our politicians have the guts to rein in some of the more irresponsible bankers and stop subsidizing them, then as Bloomberg says “With each new banking crisis, the value of the implicit subsidy grows” and at some point we will surely hit the wall. Would it not be better to stop this “costly cycle” now?

    1. "Would it not be better to stop this “costly cycle” now?"

      Most people, I should think, would say yes.

      However, I am not sure that the subsidy is solely of benefit to the banks. Bloombergs say they have calculated the benefit at so many billion a year, which may be correct, but does not the benefit accrue, at least in part, to dodgy borrowers, who get a loan that would otherwise be unavailable. In other words, is this subsidy not merely another aspect of economic stimulus?

    2. Often I think the wrong type of economic stimulus. What we need to do is encourage real investment in manufacturing, and value added manufacturing, infrastructure, etc. since such investment creates jobs today and, by stimulating real economic growth, it creates more jobs tomorrow.

      What we have seen is speculative high risk lending into property. Government is giving banks money at practically zero interest rates to lend on to home buyers as mortgages. The effect of this is not to build more houses, but to artificially inflate the house price and create speculative bubbles. The banks can’t lose since the same governments are guaranteeing the mortgages against lender default. Property buyers (and taxpayers) can lose as they have in the UK and USA. This type of lending simply causes asset price inflation and very little real stimulus.

    3. Property bubbles are easily created and they generate economic activity, new construction, renovations, wealth effect and increased consumer spending. All such activity is a form of consumption and thus diminishes long-run competitiveness. But it's the easiest way for an incumbent government to juice the economy for the sake of short-term electoral advantage.

      Stimulating investment in manufacturing, on the other hand, is difficult. At one time people in Europe and N. America made shoes and shirts, computers and car parts for one another. Now all that stuff is made on the slave plantations of Asia, where workers put in 80 hour weeks and earn less than a dollar an hour. How can you compete with that?

      Europe cannot, a rather obvious point I have repeatedly made, e.g., here.

      What is the solution? There are only two options, a return to tariff walls or some other arrangement (such as I proposed here) to make low-skilled labor in the West competitive with low-skilled labor of the Rest, or wage convergence between East and West. That's what we're headed for, but to get there, we will need a prolonged, grinding down of expectations.

      The elite think it will help Europe get competitive by bringing in masses of cheap Third World labour. But it might just generate the spark that will set off a rebellion.