If Banks Aren’t Lending, How Did They Make Recent Profits?

Question: I’ve always understood that banks made their money by lending. If they are not lending, what accounts for their recent profits?

Paul Solman: They’re lending all right. It’s just that they’re not lending much to individuals or businesses. They lending to Uncle Sam for one – buying U.S. bonds, which are nothing more than the IOUs America gives to those who lend the government money. They’re investing in the bonds of other entities as well.

And get this: they’re “lending” to the Fed Reserve – actually redepositing with the Fed most of the (electronic) money the Fed has put INTO the banking system, known as “Federal reserves.” The Fed pays 0.25% interest on these redeposits. See this story for more on that.

As long as a bank makes more on its investments than it pays to its depositors or short-term lenders, it makes money, right? And what are banks paying on deposits these days? Anyone know the Yiddish term “bubkes”?