Philip Greenspun – founder of Photo.net – has written an interesting post on one way in which big American banks are bilking the taxpayer: specifically, by borrowing money at 0% interest and then plowing it into short-term bonds yielding 2-3%. By using leverage, they can effectively earn even more. Since the bonds being purchased are mostly US Treasuries, this is an especially egregious way of generating private profits at public expense. Having been told that the banks are earning their billion-dollar profits ‘trading,’ Greenspun asks:
â€œFor someone to make money trading, there has to be someone on the other side of every trade who is losing money. Where does each bank find someone who can lose $1 billion every month?â€
No prizes for guessing that the losing party is taxpayers and citizens at large.
Greenspun has written previously on investment (including why managed mutual funds are often effectively scams).
In any case, this seems like yet more evidence that banks ought to be seriously busted down to size. It would be refreshing if they could stand or fail on their own merits, rather than propped up in vampiric form because of the systemic risk they create in the financial system.