Bank bonus

In the news daily we read about QE 2 (quantitative easing) and we wonder what it is. This time around QE 2 is set at 600 billion dollars. You recall that last year the Federal Reserve (Central Bank) came up with QE 1 and the bought up 1.7 trillion dollars in mortgages and this money went into the banks that owned these mortgages. The idea was that the banks would then have money to loan out to businesses and this would move the economy forward. The banks however chose to just buy no risk government bonds instead of risky loans to business. Since QE 1 did not stimulate the economy the Fed is now trying QE 2 and we will see what happens. Many experts say they are doing this just to show they are doing something but these same experts don’t expect this to improve the economy.
Normally when the Federal Reserve buys bonds they issue a government check and this check is deposited in some bank and the bank can now loan money. Since the law says that a bank must keep 10% of its loans in reserve the bank can loan out 90%. So how does this create money? Say the Fed buys a $1000 government bond and the bank


The fed gets its money from interest on the US bonds it owns
It the government needs money the fed can just write a check and it immediately creates the money
If the government needs money it goes to the fed and the fed writes a check and creates the money. The fed gets its money from thin air (writing checks) or from fees it collects from member banks or from interest it earns on government bonds that it has purchased in the past.
When the fed writes a check it is deposited in a bank and the bank can now loan out 90% of that money. When you turn government bonds into circulating money that is called monetizing the debt or what the man on the street calls printing money. So if the check was for $1000 and the bank loans $900 we have expanded the money supply by $900. Even though the fed has been doing this in large amounts QE1 was 1.2 trillion and QE 2 is 600 billion the money supply has not increased because so many mortgages have been called in though default and these shrink the money supply. Even today banks are not loaning money because they can purchase government bonds at three percent with no risk and they expect interest rates to rise in the future so rather than giving a home loan today at 5% they choose to wait until the rate goes up before making a loan

The Federal Reserve (Central Bank) is privately owned by member banks. The Fed gets its money from fees paid by these banks and from interest on it own portfolio which is primarily government bonds.
The Fed needed a lot of money to purchase the troubled mortgage bonds that the banks owned and for the first time in history the Treasury sold government bonds and gave the money to the Fed to buy these bonds. The member banks then received a large influx of good money to replace the toxic mortgage bonds with the idea that they would loan the money to expand business. However they used the money to purchase government bonds that pay three percent with no risk. By doing this they have made huge profits and have paid equally huge bonuses to their investment managers. How much skill does it take to buy government bonds. These bonuses totaled 143 billion in 2010. 37% of all profits are set aside for bonus pay.


TABLE 1: Bonuses and Compensation at the Top Six Banks (2010)
Bank
2010 Bonuses and
Compensation
Bank of America $35.1 billion
Wells Fargo $26.1 billion
JPMorgan Chase $25.4 billion
Citigroup $22.6 billion
Goldman Sachs $17.5 billion
Morgan Stanley $16.0 billion
Total for Top Six $142.7 billion