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Wall Street makes big money off savers
A Wall Street sign
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Allan Sloan
TEXT OF INTERVIEW
Bill Radke: Last week, Goldman Sachs said so far this year it has set aside $16.7 billion for pay and bonuses. Yesterday on NBC's "Meet the Press," Senate Banking Committee chair Chris Dodd added his voice to the chorus of umbrage.
Chris Dodd:This firms on Wall Street need to understand that what they're doing by providing these bonuses, particularly when they receive so much federal money, is an outrage in the country.
So why does Fortune magazine senior editor Allan Sloan say this bonus controversy is a distraction from the real outrage? Let's ask him. Good morning, Allan.
Allan Sloan: Good morning, Bill.
Radke: In what way are bonuses a side show?
Sloan: So much coverage and passion has gone into the bonuses that people have forgotten what's really going on, which is there has been -- as part of the government's trying to bail out the financial system and homeowners -- an enormous transfer of wealth from the savers of America to the people who haven't saved. And in the process Wall Street is making a fortune.
Radke: Tell me more about that. How is Wall Street making a fortune on the backs of savers?
Sloan: It goes like this: If you have looked at interest rates lately, they are very low. Now if you're on Wall Street, and you use a lot of what they call leverage -- which is a fancy term for borrowed money -- and borrowed money gets much cheaper, what happens to your profits? Do they go up or do they go down if the cost of borrowing money goes down?
Radke: They've been doing pretty well.
Sloan: I believe that's right. And that's a major factor in a lot of the numbers we're now seeing out of Wall Street.
Radke: But wait a minute. Weren't savers getting really low rates before the financial crisis hit? In fact, I thought low interest rates, that's one of the things that got us into trouble?
Sloan: Well, there were low interest rates around the year 2000 -- the last bailout, which was bailing out the banks and the financial system from the tech bubble. But then, the only rates that were really, really down were the short-term rates, which are the ones the Federal Reserve controls.
Radke: Well Congress can tamp down bonuses, but what can be done about low-interest rates that the government is telling us this economy needs to live?
Sloan: The answer is nothing. And it may well be that as a society we're better off as a society with low-interest rates than high-interest rates because I don't want to see the financial system collapse. But what's been happening is there's been a massive transfer of wealth from the savers of America to the spenders of America.
Radke: So in other words, it's even worse than we thought?
Sloan: Yeah, it's worse than you thought and it's different than you thought. But if you're thinking, you're way ahead of the game because most people aren't.
Radke: Fortune Magazine's Allan Sloan. Thanks a lot.
Sloan: You're welcome.
In response to Eric I.....If you invest on margin and lose your assets you are not "too big to fail". Therefore you will end up broke. No safety net for you. The same goes for real estate.
IMO the only reasonable option is a sensible mix of (index) stock and (index) fixed income mutual funds. Of course keep a cash emergency cushion. That is about all you can do in these times.
I feel your frustration and in response I'd suggest the following:
The assets that you accumulated during the runup to the crash of 2008 were (to an extent) actually never there. I believe that a healthier way to look at this recent history is that you never actually sustained any losses. What you experienced were (to a partial extent) gains that never actually existed. As we move forward the economy and people's wealth have and will continue to regress to the mean. We have a long way to go. It's frightening.....
So what is the take-home message for the little guy? It would seem to be "borrow at these low rates and invest like the big guys are dong". But of course it may be too late to invest in the stock market on margin and get good gains after the rise of the last few months. I guess this does make the argument for the investment in real-estate at this point if you can. What else should the "thinking" person be doing? The conversation seemed to stop too soon.
I think Sloan makes a good point, add in also that government is subsidizing executive pay through TARP funds. Had these institutions failed, financial executive pay would have decreased, some to $0 or unemployment. Since the lion's share of the taxes are born by the Middle Class, the transfer of wealth will be from the MC to the corporate executives (most of which are NOT MC) via government spending which is funded by tax dollars.
