The horizon is not so far as we can see, but as far as we can imagine

Bank Profits And the The Choice America Has Made

Peter Morici points out something which should be obvious:

Monday afternoon, Goldman Sachs reported much larger than expected first quarter profits, and this comes on the heels of Wells Fargo’s strong earnings reported last week.

No one should be surprised.

The Federal Reserve has provided the banks with lots of cheap funds through its various emergency lending facilities and quantitative easing.

The Federal Reserve has permitted the banks and financial houses to park vast sums of unmarketable paper on its books—securities made nearly worthless by the misjudgment and avarice of bankers. In return, the Fed has provided these scions of finance with fresh funds, cheaply, that they may lend at healthy rates on credit cards, auto loans and even mortgages.

While the Fed cuts the banks slack, the bankers are busy turning the screws on their debtors by raising credit card rates and fees, and harassing distressed borrowers with all the zeal of the Roman army sacking Palestine.

Yes, well, there you go.  Morici goes on to point out that low interest rates screw over old people who have certificates of deposit, and that the banks now want to “repay” the loans because when you’re being given money for nothing, and allowed to keep bad assets on your books at whatever price you feel is ok (since mark to market is gone), well, everything is wonderful in banker land.

(Well, unless you’re so far gone, like Citi, or Bank of America, that even in fantasy land you can’t make it work.)

As Stirling Newberry has pointed out, the economy has become clearly divided into two different economies.  One for the people who have access to money cheap and whose job is to take care of foreigners, and the other one, where credit is dear and you’re losing your job.

Guess which economy you live in?

This isn’t just going to be about employment, though that is going to suck for the forseeable future, and will, in effect, never recover.  It is also going to be about real income.  Forget the headline CPI, the costs you pay are going to go up faster than your wages (which are probably going to deflate), and your assets are going to deflate.  Riptide inflation, which catches you on both the up and downsides.

Real standards of living for median Americans are going to drop.  It’s just that simple.

In 4 to 8 years, the Republicans will probably get back in again.  They will do stupd things again.  By the end of their orgy of looting and warring (which will be even worse than Obama’s) the country is going to be extremely damaged.  Right now things could be fixed.  They probably won’t be, because Barack Obama has no intention of fixing main street, but they could be.  By the time the US gets its next real chance, well, this hole is going to be mighty mighty deep.

The US has made the choice of continuing to put its primary efforts into pursuing a chimerical paper economy which promises easy alchemical gold, rather than fixing the real economy.

But there’s no such thing as free money, not on aggregate over the long run.

And the long run is here, and by “aggregate” I mean “you aren’t an executive with the power to pay yourself millions in bonuses for destroying the US’s economy.  But you will have less money because of them.”

(Note: quote from an email from Morici, article does not appear to be online)

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11 Comments

  1. And there is an enormous chorus of economists ready to pounce on anyone who attempts to fix the real economy (ie, get an industrial policy for the USA).

  2. Though I do know that there is a lot more sophisticated anger and awareness on “main street” about the bank bailout con, more than I have previously ever seen. I’d like to be optimistic and not predict an (R) resurgence too soon.

  3. Justicia

    The cure for the paper economy is a real wealth economy.

    See Sunday’s NYT op-ed: Mr. Soddy’s Ecological Economy
    http://www.nytimes.com/2009/04/12/opinion/12zencey.html?scp=1&sq=mr+soddy&st=nyt

  4. Jim

    “get an industrial policy for the USA” Yes, if we could go back to exploiting labor time, real value could be created. Then if we could just reverse robotics, and the whole electronic revolution, we would be well on our way. Oh, and if we could just do away with the objective laws of competition, and max profit, that would help too.

  5. In return, the Fed has provided these scions of finance with fresh funds, cheaply, that they may lend at healthy rates on credit cards, auto loans and even mortgages

    Anyone else notice the sudden influx of disgusting credit card offers? A few are decent but most of what my friends and I are seeing are offers chock full of fees and horrendous rates. Some of the rates seem to rival pay day loan shops.

  6. “get an industrial policy for the USA” Yes, if we could go back to exploiting labor time, real value could be created. Then if we could just reverse robotics, and the whole electronic revolution, we would be well on our way. Oh, and if we could just do away with the objective laws of competition, and max profit, that would help too.

    The objective laws of competition are a figment and delusion. Judicious application of trade tariffs. It works!

  7. Jim

    Competition for the cheapest labor, and the continued advancement of technology, is threatening the circuit of capital. If you can’t turn over productive capital rapidly enough, then speculative capital is the way to achieve max rate of profit. Capitalism must continue to advance technology, but with labor replacing electronic technology, it can’t be absorbed.

  8. Unfortunately, I can’t argue against what you’ve written, Ian. Watching what is happening to the economy, and my government’s response to it, is depressing, to say the least.

  9. The key to making comparative advantage work is to simply not allow free capital flows. (Free trade yes, free capital flows, no.) Once comparative advantage works, the fact that labor is cheaper elsewhere doesn’t matter all that much.

  10. Jim

    If one wants to take on the free flow of capital, then one must take on the class and the state that protects it. WTO is looking to stop any barriers to international investment.
    Production is not the problem. It is completing the productive capital circuit that is the problem.

  11. One way or another, it should not be possible to profit easily from labour arbitrage.

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