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Jim Lane

(11,175 posts)
23. There's no basis for your assumption that the markup is fixed.
Wed Jun 20, 2012, 12:30 AM
Jun 2012

Using your example of a fixed 0.5% markup, you write: "If the bank borrows at 3.5%, it lends at 4%. If the bank borrows at 4%, it lends at 4.5%, and so on."

But if market conditions would allow the bank to lend out the full amount available at 4.5%, then if instead it's lending at only 4% (because the government has lowered the bank's borrowing costs), then the demand for loans would exceed the supply. In other words, some would-be borrowers who refused to pay 4.5% will be willing to pay 4%. In that instance, the bank won't woodenly keep lending at 4% until the money runs out, and then tell other loan applicants that the window is closed. No, the bank will instead calculate what rate (4.1%? 4.375%?) it can charge and still lend out all the money it wants to lend. It will happily up its markup from 0.5% to 0.6% or whatever, thereby increasing its profits.

I'll concede that there's probably some truth to your analysis to this extent: Because the government implicitly subsidizes more than one giganto-bank, it does affect the market conditions. When Citibank assesses the credit market, it's assessing a credit market in which Chase, Bank of America, etc. are also beneficiaries of this too-big-to-fail policy, which affects their lending decisions, thus in turn affecting what Citibank can charge. As a result, it's probably not a dollar-for-dollar effect. I don't know whether the authors of the quoted study considered this complication. If they didn't, their numbers may be on the high side. Nevertheless, that would only dampen the subsidization effect, not eliminate it.

In addition, the prospect of a bailout amounts to government aid to big banks as opposed to their smaller (mostly regional) competitors, which are less likely to be deemed too big to fail.

K&R'd! snot Jun 2012 #1
Take it back. aquart Jun 2012 #2
But, but, but... THEY PAID BACK THE LOANS!1!1!! Egalitarian Thug Jun 2012 #3
meanwhile...Republicans want food stamps cut by $2 billion a year Ghost of Huey Long Jun 2012 #4
Unfortunately, 22 "Democrats" joined their ideological allies in the Republican Party. bvar22 Jun 2012 #25
That one is overblown Woody Woodpecker Jun 2012 #27
Why? bvar22 Jun 2012 #29
And the bastards and their lackeys are trying this very day to take food watrwefitinfor Jun 2012 #5
Really important article to read. I encourage folks to follow the link and read. salin Jun 2012 #6
Du rec. Nt xchrom Jun 2012 #7
This is dynamite here. Will it make the nightly news? freshwest Jun 2012 #8
k&r... spanone Jun 2012 #9
Study: *taxpayers* give Mega bank JP Morgan Chase a $14 billion annual subsidy. dixiegrrrrl Jun 2012 #10
that works for me abelenkpe Jun 2012 #11
It just gets more disgusting every day. Autumn Jun 2012 #12
An interesting perspective, but its not really a subsidy bhikkhu Jun 2012 #13
Then the government should just loan it to the people without Angry Dragon Jun 2012 #15
That would be one way to do it bhikkhu Jun 2012 #17
Not relevant. Igel Jun 2012 #20
No, Bloomberg got it right. girl gone mad Jun 2012 #16
Yes, the "expectation of government support" increases lender confidence bhikkhu Jun 2012 #18
There's no basis for your assumption that the markup is fixed. Jim Lane Jun 2012 #23
No, they didn't. Igel Jun 2012 #21
Not true at all. girl gone mad Jun 2012 #24
Thank you for the explanation and citation. n/t truedelphi Jun 2012 #30
Corporate welfare Angry Dragon Jun 2012 #14
It's a calculated value of the effect of expected government support on the credit worthiness RB TexLa Jun 2012 #19
Nice explanation and citation regarding the word subsidy and how truedelphi Jun 2012 #31
Indeed NOT a "subsidy" econoclast Jun 2012 #32
Except the funds aren't being granted in by the government. There are no government funds RB TexLa Jun 2012 #33
Plus government pays for food stamps to supplement their janitor's poverty level salaries. Kablooie Jun 2012 #22
Well, how about that. -eom Huey P. Long Jun 2012 #26
Hmmmm Quantess Jun 2012 #28
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