~ Archive for Computer nerdism ~

If Piketty is right about rich people getting high returns, why do banks lend at low rates?


A critical assumption in Thomas Piketty’s Capital in the Twenty-First Century is that rich people get a better return on investment than average S&P 500 buy-and-hold idiots. This assumption leads to runaway wealth inequality and the necessity for a new worldwide tax on wealth.

Why do rich people get such a great return, according to Piketty? They have access to brilliant financial managers and investments that the rest of us can’t find.

What about big banks then? With billions in assets they are unarguably rich. Their office towers are stuffed full of the best financial managers that $500k-$20 million/year salaries can buy. They sit in the biggest cities and have access to every conceivable business idea. Big Banks should have ever better investment opportunities than Mr. Generic Rich Bastard. Yet they are happy to lend out money right now for a return of about 2 percent (e.g., margin interest on stock holdings, best adjustable mortgage rates for the first five years). If there are such great investment opportunities out there for the sufficiently rich and sufficiently connected, why would a big international bank want to lend out money at 2%?

Limits to government power


In Alan Greenspan’s autobiography, he says that the Fed could not control interest rates; if the Fed had insisted on a high rate of interest for dollars, banks could have borrowed dollars at lower rates from Chinese holders of dollars.

In today’s New York Times, “Why Markets, Not the Treasury, Determine Bank Capital”, tries to explain why the government’s scheme for bolstering bank capital turned into higher dividends for shareholders, acquisitions (e.g., Bank of America buying Merrill and Countrywide), executive bonuses, and just about anything other than more bank capital.

Looking at my economic recovery plan it seems that it still makes sense in light of information that the government is not all-powerful. All of the changes that I propose are to things that the government does control or run, e.g., tax rates, rules for corporate governance, schools, public employee unions, immigration decisions.

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