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Wall Street makes big money off savers

Marketplace Staff Oct 19, 2009

Wall Street makes big money off savers

Marketplace Staff Oct 19, 2009


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.

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