By Willy Staley  Thu Aug 2, 2012

No Monetary Stimulus Is Bad News for Banker Bonuses

There will likely be no monetary stimulus this year: not from the Federal Reserve, and not from the European Central Bank. Despite stagnating economies on either side of the pond, neither central bank is using its considerable power to stimulate the economy. Bad news for you and I, perhaps, depending on your faith in monetary stimulus.

According to Dealbook, though, it’s really bad news for one group of people you love to hate: investment bankers. Their bonuses might be lacking this holiday season — for shame!

To wit:

Big trading banks are particularly well positioned to profit when central banks act aggressively. The firms help make markets in bonds and derivatives. When the banks’ clients see the Fed take bold steps, they feel encouraged and come off the sidelines to buy more bonds. This increases the amount of business that flows through Wall Street, but it also lifts the prices of the bonds the banks hold, creating profits for the traders. The banks also deliberately increase the size of their bond holdings when they are convinced that central bank actions will lift markets.

And now, without any stimulus from central banks, investment bankers might not get big bonuses this year. Also, most Western economies will continue to stagnate — maybe. And should credit tighten further in London and New York and Frankfurt and other big banking centers, the effects could be felt all over the globe. So, there’s that, too, in addition to deleterious effects on bankers’ paychecks.

But there’s a bright spot here, both for i-bankers and plebes like us: “Both the Fed and the European Central Bank made it clear this week that more forceful initiatives could happen later if economic and market stresses worsen. Many on Wall Street will be hanging on those assurances.”

We think some people outside of Wall Street are, too, whether they know it or not.

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