February 27, 2013

Big Banking and the Taxpayer

     I would like to discuss a recent editorial article published on Bloomberg entitled: "Why Should Taxpayers Give Big Banks $83 Billion a Year?"


     To summarize, this article makes the claim that the largest banks in the United States are largely unprofitable, and rely on heavy government subsidies to garner their reported "profits". Corporate welfare is a practice many of us are familiar with, but what shocked me about this article was the numbers attached to it. According to the editorial, two researchers from the IMF and the University of Mainz tried to determine how much the subsidies lower the borrowing costs of banks, and found the number to be 0.8% (applicable to all liabilities). You're probably with me in thinking this number initially sounds very small, but when "multiplied by the total liabilities of the 10 largest U.S. banks by assets, it amounts to a taxpayer subsidy of $83 billion a year." Of this subsidy, the top five banks account for $64B. "In other words, the banks occupying the commanding heights of the U.S. financial industry -- with almost $9 trillion in assets, more than half the size of the U.S. economy -- would just about break even in the absence of corporate welfare. In large part, the profits they report are essentially transfers from taxpayers to their shareholders."

     In discussions about business, it is common to hear the words "too big to fail." If the information in this article is true, that statement is fundamentally false, as these banks would not be able to report these profits without the subsidy. I believe "big enough for government insurance" would be a more accurate statement. As the article pointed out, neither the shareholders or executives see incentives to change this subsidy, and fund lobbying campaigns year after year. I believe this is a clear-cut example of the vicious cycle of interventionism, as these banks likely would not have grown to the size they are without corporate welfare in the first place, but are so huge now that not bailing them out would be disastrous (and they will be the first ones to argue the latter statement). The obvious results of this are wasteful business practices and lack of adaptation to real markets. I agree with all the 'fixes' suggested in this article, but most notably I think that creditors, shareholders, and executives should be able to take hits, just as people in any other competitive business can. The influence of the business on the economy as a whole should not be a factor, as the costs of failure will only be short-term, and any further subsidy is simply delaying the inevitable. The way these large banks, and any other subsidized corporations operate is fundamentally unnatural. One of the core tenants of both Austrian and neo-classical economics is freedom, and this includes the freedom to make profits and the freedom to fail. 

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