How Bank Profits Come From Interest Payments at Zero Cost of Capital

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Executive Summary

Banks have virtually no cost of capital, and the principle is entirely conjured from nothing. Thinks makes recording bank profits an exercise worth analyzing.

Introduction

How the system works is explained in the following quotation.

The principle or loan amount as created from nothing, a power granted to the bank by the government. The bank has no cost of capital. If a loan payment of $2500 per month is made, that amount subtracted from expenses is the bank’s profit. The bank must allocate some portion of the payment to decrement the principle. But that is just a book keeping entry so that the principle goes down each month (or the term would be infinite). The bank gets virtually all of its capital for free because it can create money with accounting entries. Although, according to Michael Hudson, banks are creating loans that are designed to never be repaid. This is covered in the following quote – “the government Federal Housing Authority guarantees mortgages – government guarantee the mortgages – up to 43% of your income, and the banks can fiddle by saying, ‘OK we won’t have to pay any amortization so you won’t own your house in 30 years. You won’t have repaid any of your debt at all. You’ll just be paying the … it’s an interest only loan and you don’t have to make any down payment’. After World War 2 you had to make 20 or 30 percent of the price of the down payment so the banks have added, they’ve leveraged the whole market because banks don’t ever want the loans to be repaid. They want the loans to grow and grow and that’s what makes, ultimately, the debts impossible to be repaid. So the banks and financial system have lobbied for a system that must mathematically collapse. That’s what Steve and I are talking about. It’s the way it’s set up.”

Source: Michael Hudson

https://michael-hudson.com/2020/12/jubillee-perspectives-with-steve-keen/

Where Do Loans “Come From”?

The principal or loan amount is created from nothing, a power granted to the bank by the government. The bank has no cost of capital. If a loan payment of $2500 per month is made, that amount subtracted from expenses is the bank’s profit. This is the key point. The bank is being compensated for doing nothing more than checking the ability to pay. This would be like a company selling an item that it did not have to make and did not have to pay for. Owning a chartered bank is a license to print money. The bank must allocate some portion of the payment to decrement the principle. But that is just a bookkeeping entry so that the principle goes down each month (or the term would be infinite). The bank gets virtually all of its capital for free because it can create money with accounting entries. Banks then pretend that this money is something that they did not simply create.

Banks as the Ultimate Welfare Queens

Banks use capitalist phraseology when in reality, they live off of the nipple of the government and off of the taxpayers and have no idea this is how private banking works.