Diatribes - Computer, Economic & Political

This blog is really just for me. If you find something interesting on it, leave me a comment. If you disagree with something, let me know what and why. In this blog I am just putting some of my thoughts for computers, the economy, politics, and other topics in writing.

14 January 2010

Bank Bonus Outrage... Again

I'm not surprised by the continued furor over bank bonuses, but I am surprised that so many people seem to think these bonuses were unexpected.

Here's how banks work.  They take money, give it to the most attractive investments, and earn interest on these investments.  The interest they earn only needs to be higher than the interest they're paying for the money in the first place (with some cushion for defaults).  Easy right?

What happens when several of the largest banks fold, and remaining banks get pumped full of free money?  Fewer banks are competing for investments, and these banks can earn very low rates of return (virtually anything over zero) and still clear a profit.

Now of course these banks are raking in money hand over fist.  That was the point of giving them free money - to stabilize the big banks taking big losses over bad investments - we made it easier for banks to make money.  The loss of competition was just a bonus for surviving banks.

What did we think the banks would do with this money they're now earning?  Give it away to the poor?  Of course not, they're going to reward the bankers who needed to earn a rate of return just over zero.  A job, I might add, which is relatively easy to do, at least compared to the mathematical gymnastics they engaged in to get high rates of returns from CDOs and CDSs and MBSs etc.

This was the point of the entire project - to make banks profitable.  Why are we surprised banks are rewarding those who happen to be at the helm during this prosperity?


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