From Hugo Domic
In recent Post Krugman says: “The latest fad — illustrated by this piece in today’s WSJ — is that expansionary monetary policy is a giveaway to banks and plutocrats generally.” He tries to argue that it’s not, but the record profits of the banking and financial sector say otherwise…
Krugman goes further and says: “To claim that it’s effectively a gift you have to claim that the prices the Fed is paying are artificially high, or equivalently that interest rates are being pushed artificially low.” He is talking about the Fed policy
Well Interests rates are being pushed artificially low!
Since the creation of the Cartel of Banks in the United states in 2008 reuniting commercial and investment banks, banks can use the money the Fed is printing not only to give loans but to invest on financial markets! Proof of that is the non-increase of loans.
Since loans do not increase the Fed is obliged to lower interests rates to try to stimulate credit, but since for Banks is more profitable to invest on financial markets than to borrow to people they take that money and put it on the Financial markets. As a consequence Interests rates must be pushed artificially low in order to try to induce banks to give loans!
So the problem is that banks are not pushing the money to the loan market but to financial markets (the record profits of this year should suffice as proof), so even if we keep giving, printing or facilitating money to banks is more profitable for them to play on the financial markets! So unemployment and output will continue to suffer.
It’s just like if you give money to a gambler and he has two options go to the casino or invest in the long run on something, which one you think he will choose? (obviously go to the casino)
The Naive vision of banks is very dangerous it lead us to wrong conclusions and it costs a lot for millions of people! It is most astonishing when we read Krugman saying: “Banks are largely in the business of borrowing short and lending long” That is on textbook for children, in the real world Banks are in the business of making Money now! They borrow short and invest short on financial markets! The lending channel is a joke compared to the amounts they use on Financial markets.
For those of you who saw or read the movie “Too big to fail” the final scene of the movie is amazingly sharp: Bernanke asks, “They will lend the money out, won’t they?” Paulson, who gazes out the window, as if contemplating the question for the first time. He insists they will. But an unmistakable moment of doubt passes across his face.
Fade to the postscript. There we learn that, whoops, the banks didn’t lend it out after all. Instead, they got bigger, banker bonuses recovered, and Wall Street is getting bottle service at velvet-roped clubs all over again. The world was saved from ruin, but the banks quickly went back to business as usual and even felt self-righteous about it.
So we can positively say that interests rates are artificially low because of the crook Banking and Financial System. We must in a urgent way change the naive views that banks serve only as loaning agents. And mainly in academia the utopic and naive version of the banking system must be urgently fixed in order to give better policy recommendations to governements and have better models.