
How Wall Street is making its billions - soundsop
http://blogs.law.harvard.edu/philg/2009/10/17/how-wall-street-is-making-its-billions/
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seldo
So, to summarize:

1\. The US government loans money to the banks at 0% interest

2\. The banks buy treasuries at 2% interest

Why is the US government selling treasuries in the first place? In order to
have money to bail out the banks' earlier losses.

Net-net: the banks are stealing money from US taxpayers.

Do I have this right?

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anamax
> Do I have this right?

You're missing an important detail - this is nothing new.

Banks have always borrowed money from the US govt (and others) at X% and
loaned it at Y%, where X < Y. (There's no point in that arrangement if X >=
Y.)

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aaronblohowiak
With _risk_. What is the risk in buying US bonds?

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dandelany
That the USD is increasingly worthless in the world economy.

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Confusion
That has nothing to do with the security of a US government bond.

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Xichekolas
Why not?

US bonds are redeemed for US dollars. If the dollar becomes increasingly
worthless, why would you want to hold the bond?

Granted, I think saying the dollar is "becoming increasingly worthless" is
being hyperbolic.

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jeromec
You know between this and the link posted the other day
([http://www.rollingstone.com/politics/story/28816321/the_grea...](http://www.rollingstone.com/politics/story/28816321/the_great_american_bubble_machine/print))
about Goldman Sachs I start to wonder if we that strive to create wealth with
technology, with odds of failure stacked squarely against us, are really the
smart ones. Sheesh. Too bad I have morals.

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aswanson
I've gone through that line of thought more than once and I've come to the
conclusion that what we do or attempt to do is far more beneficial to human
advancement than these bullshit 3 card monty games. That has to count for
something, at least in terms of self-respect.

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drunkpotato
This is very true on the technical end of things. Where we (and by we, I mean
the human race) are lacking is on the political end. I have come to the sad
conclusion that there are not enough hackers in the political system. By a
political hacker I mean people who are willing to experiment, to tinker, to
say "I don't know if this will work, but let's try to find out", people who
are empirically-minded and data- rather than poll-driven. I don't know how to
solve this problem, either, as those of us of this mind-set tend to be more
technically oriented than politically oriented.

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kenshi
So if you are part of the "False Economy" you get to make billions thanks to
the suckers... err tax payers... who will bail you out, whilst everyone in the
Real Economy gets to suffer the effects of the Financial Crisis.

Maybe it's time to go back to contracting work at financial institutions...

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pmorici
This sounds like what Enron was doing to cook it's books, just moving money
around, except in this case the banks and the government aren't technically
the same entity but heck they might as well be after the bail out.

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anamax
The banks and govt aren't technically the same entity, but the govt may well
be a controlling entity.

What are the odds that the controlling entity won't use the banks for
political advantage, say lower loan rates in "red states"?

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joshu
I wonder what fraction of the Treasuries sold at auction are purchased by the
banks engaging in this behavior?

If it's a decent but not overwhelming amount, it could be causing the auctions
to be priced hire and thus overall increase the government's take.

So it's not necessarily clear what's happening here...

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joshu
Actually, to get $3b in return, consider how many billions of dollars they'd
have to buy of Treasuries. (1yr are paying .37% through 4% on 30yrs, which
they probably aren't buying.)

Anyone know offhand how much the banks did borrow?

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rebelvc
This article is complete crap! At 3.6 Billion per quarter. Let say JP Morgain
makes 10.8B a year. To make that with 2% yielding T-Bills the govt would of
need to lend JP Morgan well more than 5.4 trillion.

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Confusion
Firstly, you're a factor 10 off: 10.8B is 2% of 540 billion. Secondly, 3%
already reduces that to 360 billion. Thirdly, you missed the important word
'leverage' in the article.

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rebelvc
Yea I did get the factor off. Leverage means using borrowed money to make more
money. Other than the government where are you going to borrow at less than 2%
interest rate? The financial institution does a lot more than buying t-bills.

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nkassis
Hum but isn't that in essence how the government is able to make deficits? I
mean, without this process the gov wouldn't be able to fund itself other than
by taxes.

So the federal reserve creates money by loaning at ridiculously low rates
(currently it's not a bad idea if there really is a threat of deflation),
banks then use that money to fund the government by buying treasuries and in
such we just inflate the money supply? So banks are like facilitators for this
to happen and get 2% back for it?

I dunno, I mean yes they make awe full amounts of money but can you really go
about cutting out the middle men completely here?

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Confusion
_without this process the gov wouldn't be able to fund itself_

How exactly does one fund itself by lending money that is then used to buy
bonds? The net result is 0 for the government. If they have money to lend,
they would be better off just using that money in the first place.

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known
<http://en.wikipedia.org/wiki/Fed#Goals>

