If a bank is designated as too big to fail (TBTF), it gets on the gravy train. So concluded an editorial at Bloomberg.
It pays to be too big to fail.
In the case of J. P. Morgan Chase bank, the subsidy is worth $14 billion a year, according to research published by the International Monetary Fund.
Around the world, central banks intervene to make cheap, newly created money available to bail out TBTF banks. They guarantee that all of the bank’s creditors will get money to repay banks. It’s like the FDIC, only it’s for the Big Boys. Think AIG.
The smart money then goes for high-risk, high-profit investments. Why not? They will be bailed out if they guess wrong. It’s “heads, we win; tails, we win.”
Bloomberg estimated the dollar value of J. P. Morgan Chase’s subsidy at $14 billion a year. For the 18 largest banks (out of 8,000), it is $76 billion a year.
This is just about the same as the banks’ annual profits. Concludes Bloomberg: “JPMorgan’s share of the subsidy is $14 billion a year, or about 77 percent of its net income for the past four quarters.”
Like all subsidies, the taxpayer largesse distorts supply. If the government supports corn farmers, you get too much corn. If the government subsidizes banks, you get too much credit. As of March, households, companies and government in the U.S. had amassed debts of $38.6 trillion, or 2.5 times the country’s gross domestic product. That’s up from 1.3 times in 1980. The picture is similar in the euro area, where debt outstanding is 1.8 times GDP, double the level of 1995.
Conclusion: “The result is a bloated finance industry: As of 2011, the sector accounted for 8.3 percent of the U.S. economy, compared with 4.9 percent in 1980.”
Is this likely to change? No. The banks are major sources of campaign financing.
More important is this: the central banks have always served as sources of bailout money for the largest banks. This goes back almost a century in the USA.
Central banks exist to serve as the banking cartel’s safety net.