Now, assuming that the government is able to persist in misusing public funds and abusing public trust in order to protect the bondholders of these institutions from losses, it's reasonable to ask: Could the banks eventually “earn their way out” of their losses over the longer-term?
To answer that question, you have to think in terms of equilibrium. Even holding GDP constant, the earnings to recover the losses have to come from somewhere, which implies a redistribution away from where they were going before. Really, money doesn't grow on trees. We've got an economy running with outstanding debt of about 350% of GDP. Even a moderate percentage of that as loan losses will represent a significant share of GDP. To reallocate enough funds to fill that hole, we would have to keep deposit rates near zero, and corporate lending rates high, so that financial institutions would earn a persistently wide spread, or “net interest margin.” Over the short-term, that's what's been happening, so ironically, banks are more “profitable” today than they probably will ever be. Unfortunately, that “profitability” is an artifact of a) unsustainably wide net interest margins, and b) a failure to adequately book losses, at the encouragement of government bureaucrats.
Consider the economic landscape. The
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