Recently, Bloomberg conducted a study on a federal bank subsidy that, according to Bloomberg, shows that “the largest U.S. banks aren’t really profitable at all.” Instead, banks are making profit solely upon a lower borrowing rate, to the tune of $83 billion annually. The study concludes:
Banks have a powerful incentive to get big and unwieldy. The larger they are, the more disastrous their failure would be and the more certain they can be of a government bailout in an emergency. The result is an implicit subsidy: The banks that are potentially the most dangerous can borrow at lower rates, because creditors perceive them as too big to fail.
According to a follow-up editorial, Bloomberg’s editors note their estimate is one of many calculating the size of the subsidy. The estimates range from $30 billion to $300 billion annually.
As the editorial also notes, this subsidy is devastating to the American taxpayer and economy. Not only is the subsidy large (and, at any size, immoral), it exacerbates the problem of Too Big To Fail, thus incentivizing another financial meltdown. From the editorial:
The repercussions of taxpayer support for banks are far- reaching. To steal a thought from a previous editorial, if you subsidize corn farmers, you get too much corn. If you subsidize banks, you get too much credit. As of September, the total debts of households, companies and governments in the U.S. stood at 2.5 times annual economic output, up from 1.3 times in 1980. While it’s hard to say what the right level should be, the recent credit-related crises in the U.S. and Europe suggest we’re pushing the outer limits.
The editorial and the study offer a variety of potential solutions, but almost anything is better than setting the American people up to bail out the banks again. Too Big To Fail has been in the works for decades, but that does not mean it should continue. Kudos to Bloomberg for raising awareness of how bad bank bailout policy continues.