5 Scandalous Reasons Big Finance Is Trying Hard to Keep a Low Profile
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5. Fed by the Fed
Notably, the banks are increasingly dependent on government action for their profits. In recent years, the central bank of the EU and the US Federal Reserve have engaged in a somewhat desperate mode of economic stimulus, “quantitative easing,” where the Fed buys bonds from major banks in order to inject more cash into the banking system, with the goal of lowering interest rates and hopefully increasing economic growth. This bond buying has become a significant profit center for the banking majors, with bond-trading income exploding shortly after each round of (mostly ineffective) monetary “stimulus.” The business press notes that “Big trading banks are particularly well positioned to profit when central banks act aggressively. The firms help make markets in bonds and derivatives. When the banks’ clients see the Fed take bold steps, they feel encouraged and come off the sidelines to buy more bonds. This increases the amount of business that flows through Wall Street, but it also lifts the prices of the bonds that banks hold, creating profits for the traders.”
The ability of the banking industry to sustain its profitability and power despite scandal after scandal – and after crisis after technological disaster -- speaks to its unparalleled power in the modern economy. But beside the social power of the firms to dominate markets and shape perceptions with ad spending, and their obvious political muscle, the banks also make use of their power in a more everyday fashion, in maintaining relatively high retail interest rates in the US. The mortgage-handling banks are benefiting in historically large terms from the growing spread between the low rates they pay to investors they sell mortgages to, and the higher rates they charge the actual homeowner. The Times business section notes that “if the market were functioning properly, the recent drop in the bond rates should have led to a larger decline in mortgage rates for consumers than has actually occurred. Instead, the difference between the two rates is increasing.” One suggested reason: “Mortgage lenders may also be benefiting from less competition. The upheaval of the financial crisis of 2008 has led to the concentration of mortgage lending in the hands of a few big banks, primarily Wells Fargo, JPMorgan Chase, Bank of America and US Bancorp.”
This long record suggests why the finance industry is trying to keep a low profile these days. With banks like these, who needs enemies?