How Wall Street is making its billions
blogs.law.harvard.edu
blogs.law.harvard.edu
1. The US government loans money to the banks at 0% interest
2. The banks buy treasuries at 2% interest
Why is the US government selling treasuries in the first place? In order to have money to bail out the banks' earlier losses.
Net-net: the banks are stealing money from US taxpayers.
Do I have this right?
Except for the free money part.
You're missing an important detail - this is nothing new.
Banks have always borrowed money from the US govt (and others) at X% and loaned it at Y%, where X < Y. (There's no point in that arrangement if X >= Y.)
US bonds are redeemed for US dollars. If the dollar becomes increasingly worthless, why would you want to hold the bond?
Granted, I think saying the dollar is "becoming increasingly worthless" is being hyperbolic.
But in this case, they seem to be borrowing long and lending short (or at least borrowing short and lending short).
It's not like the government is going to go demand it's money back like someone with a savings account is free to do.
And really, would you take $200k to the bank and deposit it at 0.5% interest and then take out a $200k mortgage at 6%? You might if you were concerned about liquidity (unsteady income?) and could get at the $200k in savings when you needed to. But if you didn't have that flexibility, it wouldn't make sense.
when the govt is giving out amount X money, and wants amount X + INTERESTX back. how can that work? where should INTERESTX come from when they only gave us X?
This ensures, that there is always debt. Money has value only if there is debt and you must use some to get out of it. Why would you need it otherwise?
The carry trade is nothing new either, it's often used for example when borrowing rates in other countries are favorable compared to rates on US treasuries.
It's like getting points by entering a cheat code.
After that our participation ends except for the "little" paying of taxes part. The people we vote for are loyal to the companies and political interests that actually promote them into power.
Then there is the revolving door between government agencies and the banks and other big companies. All the SEC big wigs are the same big wigs that were running the major banks and investment companies. And the same goes for FDA, Department of Agriculture and any other government agencies. They might as well just merge the two -- if a company becomes "too big to fail", it should just become a part of the government because in effect that what is happening.
So if our goal is "to create wealth", technology is not the way to go. Create a bank and become "too big too fail" -- then we'll get 0% loans and we can boast about great profits that "exceed analysts expectations" every quarter.
As jaded towards the political process as I am, this is not always the case. Sometimes these people actually believe in what they are doing. They are just financed by the industries that their actions are supporting because the industry wants to support someone that is supporting them.
That said, there's no real way to tell the percentage of these people vs. the people who sell their morals/principles to the highest bidder.
You could join in their game by building companies on VC and flipping them. I hear thats popular with the kids.
> Too bad I have morals.
With morals you will never be truly rich.
"Aikido is performed by blending with the motion of the attacker and redirecting the force of the attack rather than opposing it head-on"
Rather than lamenting Wall Street's unproductive money games and doing nothing about it, we could embrace the fact that these tools exist in the current economic climate and we could use these tools to generate the capital we need to further the goals of more productive pursuits.
Maybe VCs like Fred Wilson who have both financial leverage and disdain for shenanigans (technical term) could use capital generated by playing Wall Str's funds shuffling game to build meaningful companies who create things and create a more sustainable and entrepreneurial base on which to build an economy.
Use this tool against itself.
No? Naive?
Maybe it's time to go back to contracting work at financial institutions...
What are the odds that the controlling entity won't use the banks for political advantage, say lower loan rates in "red states"?
If it's a decent but not overwhelming amount, it could be causing the auctions to be priced hire and thus overall increase the government's take.
So it's not necessarily clear what's happening here...
Anyone know offhand how much the banks did borrow?
Say you have $100. You can invest that $100 at 2% interest and earn $2. You end up with $102.
Leverage is complicated, and I'm not totally sure I understand how it work, but basically it allows you to amplify your money.
Instead of just investing $100, you take out a loan of $10,000 at 1% interest: you know you'll have to pay back $10,100, but you've already got that much. Now you've take that $10,100 and invest it at 2%, and you get $202 interest -- you now have $10,302. You pay back the $10,100 you owe, and you end up with $202, having earned 100x more than if you'd just invested without leverage.
So the federal reserve creates money by loaning at ridiculously low rates (currently it's not a bad idea if there really is a threat of deflation), banks then use that money to fund the government by buying treasuries and in such we just inflate the money supply? So banks are like facilitators for this to happen and get 2% back for it?
I dunno, I mean yes they make awe full amounts of money but can you really go about cutting out the middle men completely here?
How exactly does one fund itself by lending money that is then used to buy bonds? The net result is 0 for the government. If they have money to lend, they would be better off just using that money in the first place.