(Using laymen's language, what follows here is a simplified version of an article by economist Dean Baker at http://www.guardian.co.uk/commentisfree/cifamerica/2009/aug/31/banking-profits-us-economy
Even that giant corpse Citigroup is showing signs of life. But how could that be? Answer: Our government is using our money to pick up Citigroup's bad debts and is paying them a nice profit for the "privilege.
Here's how it works: We (through our government) lend big banks the money that they then lend back to us, albeit at a considerably higher interest rate than the rate that we (through our government) charge them for what we loaned them.
To use simple round numbers, let's say that the big banks have borrowed $1 trillion from the Fed's various lending facilities. (Actually, the Fed's total loans to the banks now exceed $2 trillion.)
Now suppose the banks pay an average interest rate of 0.2% for this rounded off trillion dollars that they've borrowed. If the banks then use that trillion to buy up government bonds that pay a 3.5% interest rate, they can pocket the difference of 3.3 percentage points. This means that on a trillion dollars of federal lending to them, the banks will ˜earn' $33 billion a year in net interest or profit! Essentially, this is the extra money that our government is paying the banks so that we can borrow back the money that we lent them through our Fed. In other words, we taxpayers are essentially giving banks like Citigroup many billions every year through crazy schemes like this. And the big banks are referring to these giveaway billions as ˜earnings'!
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