Every once in a while you have to say, “I told you so.” This is one of those days.
As we've been saying on this show for some time now, the Dodd Frank law, which rewrote the regulatory rulebook for banks, did nothing to get rid of "too big to fail," the implied promise that big banks will get bailed out if they get into trouble. Just like they did during the financial crisis.
In fact, two researchers have actually pinned down what that promise means to banks: a subsidy of $83 billion a year.
Here's the math: big banks pay nearly a full percentage point less in borrowing costs or interest rates because they are backed by the federal government. If any one of the big banks were to go bust, the government would face enormous pressure to step in and keep the bank going. That interest rate discount applies to everything from bank liabilities, to customer deposits.
That one little percentage point makes a whale of a difference. If you multiply that amount times the total liabilities of the 10 largest banks, you get $83 billion a year. According to the researchers, that's akin to giving the banks three cents out of every tax dollar collected.
Now, most of the benefit is going to just five big banks: J.P. Morgan, Citigroup, Wells Fargo, Goldman Sachs and Bank of America. Were you to take away that subsidy, you might take away their profitability. In other words, this benefit is keeping this sector afloat!
Today, the Senator Elizabeth Warren got in on the action by asking Fed Chairman Ben Bernanke why we give such a freebie to the sector, and David Vitter agreed with her, saying "too big to fail" is alive and well.
What's interesting is that Senator Elizabeth Warren is as left as it gets, while David Vitter is very conservative.
That should tell you something, the hard right and the hard left agree on something. They may have a point. The government needs to get out of the business of guaranteeing the business of the banks.
We can't afford it.