Private Benefits, Socialized Costs

Honestly, I'm having trouble caring about the latest meme on the recent Fed actions, namely that they are socializing the costs (i.e., having the taxpayers bear them) of risky actions but allowing the private benefits to accrue to financiers. True, it may be bad (macroeconomics is not my forte, but I am not in the least impressed by neo-Austrian or folk economic explanations of how the Fed steals money from us ordinary peons). Nevertheless, suppose it's completely true that the Fed is handing over benefits left and right to people in finance.

Does anyone seriously doubt that high finance is a net positive contributer to the national government? Between the taxes on corporate earnings (the max rate is what, 35%?) and 35% top rates on income (federal alone), the government siphons off enormous sums during boom times. So during normal times the government takes a large percentage of the proceeds of finance, and every now and again the flow goes the other way. But surely in net, financiers help pay for government and not the other way around.

Now, there's certainly a moral hazard argument against Fed 'bailouts', and I'm sympathetic to them. But forgive me if I refuse to be OUTRAGED!!!! if the house throws a chip or two back at the bankers every couple of years.

ADDENDUM: To clarify a bit, it's not that I don't think bailouts and the like (if that's what this is) are wrong. I do. It's more along the lines of this argument here, regarding how the rich really do subsidize the government. There's a current of populist belief out there that somehow the federal government just lines the pockets of financiers, but I just don't think that's the case on net, and until I'm persuaded otherwise on that fact, emotionally, I just can't get up in arms about these things, even if I think they are wrong.

[Some of the above text was also edited for clarity.] 

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Let's do it in three lines

1 month libor : 2.61%
- fed fund rate : 2.25%
= 36bp

If you let me borrow 36bp under libor *, I'll be glad to pay as much income tax as you want.

* say by granting me a banking license.

Carry Trade

The carry trade (a simplified version of which is what you are proposing here, it seems) is hardly risk free. A relatively minor change in currency rates and your 36 basis points goes up in smoke in one hell of a hurry.

What currency rate are you

What currency rate are you talking about ? You're facing two risks, credit risk on libor, which is extremely small and the risk that the spread between one month libor and fed funds moves against you...

You're right. LIBOR rate

You're right. LIBOR rate borrowing can be done in dollars. I was thinking you were trying to arbitrage across central bank rates.

Nevertheless, the point remains that it's not just free money to the banks.

Uh... yes it is.

Uh... yes it is. I would give everything I own for a banking license.

How about just giving me a license to print money

Let me print as much money as I like. I'll pay 75% in tax to the government for my efforts. Then if I should get in trouble perhaps by running out of ink or paper one month they can "pay me back" by making up the difference in the amount bills I wasn't able to produce so I can maintain my lifestyle. Reductio ad absurdum.

Banks don't print money. But

Banks don't print money. But they have ink spots on their fingers when the FED lends on the repo market.

I wanted it a little easier

Hey, as long as I'm wishing for things why not make it a little easier on myself.   Besides, isn't that the point of reductio ad absurdum to push the limits.    In this case instead of having the fed buy my assets (perhaps bonds I've printed up) with freshly "printed" money I instead do it directly myself.

I oppose bailouts

As soon as I made this post, I regretted it, mainly because I'm not sure my point came across. I oppose bailouts. Period. I have never said otherwise.

But what I do not support is the demonizing of finance, which seems to be a hallmark of a certain strand of populist libertarian thought. I don't quite understand it myself, but there seems to be a belief that somehow money from finance is ill-gotten gold, that banking is not a real service or product. That's just wrong. Directing capital is a monumental task in a world economy worth tens of trillions, and the participants in it are very well compensated for performing a legitimate service in a legitimate industry.

And I do not support quasi-conspiratorial views of government, that everything exists in the shadows and is manipulated by the nefarious forces of The Bankers. Like I said, if you can provide something resembling a total costs/benefits accounting that says that government makes a net transfer to finance, I might be persuadable. But you're going to have to do a lot better than "they get to print money", which seems to be a distressingly popular point of view.