It's not quite "let them eat cake" to the "too big to fail" banks, but Senator Elizabeth Warren (D-Mass.), the newest member of the Senate Banking Committee, put the press to Ben Bernanke on the Federal Reserve's implicit guarantee of a bailout to "too big to fail banks" at committee hearings this week. Warren pointed to a recent piece from Bloomberg that valued the discount big banks get to borrow at $83 billion a year. Asks Bloomberg:
So what if we told you that, by our calculations, the largest U.S. banks aren't really profitable at all? What if the billions of dollars they allegedly earn for their shareholders were almost entirely a gift from U.S. taxpayers?
Granted, it's a hard concept to swallow. It's also crucial to understanding why the big banks present such a threat to the global economy.
Let's start with a bit of background. Banks have a powerful incentive to get big and unwieldy. The larger they are, the more disastrous their failure would be and the more certain they can be of a government bailout in an emergency. The result is an implicit subsidy: The banks that are potentially the most dangerous can borrow at lower rates, because creditors perceive them as too big to fail.
Warren asked Bernanke why banks shouldn't pay for this implicit subsidy, to which the Federal Reserve chairman responded "I think we should get rid of it." He didn't clarify, naturally.