The rest of the nation may be getting back to basics, but on Wall Street, paychecks still come with a golden promise. Workers at the largest financial institutions are on track to earn as much money this year as they did before the financial crisis began, because of the strong start of the year for bank profits. Even as the industry's compensation has been put in the spotlight for being so high at a time when many banks have received taxpayer help, six of the biggest banks set aside over $36 billion in the first quarter to pay their employees, according to a review of financial statements. If that pace continues all year, the money set aside for compensation suggests that workers at many banks will see their pay – much of it in bonuses – recover from the lows of last year. – New York Times
Dominant Social Theme: Commerce rebounds as it must.
Free-Market Analysis: Wall Street was wiped out less than a year ago. In September 08, we've read, the American banking system froze up and absent an injection of some US$700 billion the current paper money system would have foundered and failed. But just because the banking system around the world has been saved, as this fairly smug article from the New York Times seems to conclude, doesn't mean that the larger financial system is back to normal.
What the bail-outs seem to confirm, for us anyway, is that the banking bubble – which is the largest bubble of all – is also the first to have been re-inflated. People have been conditioned to think of banking as an inviolable part of the economic scene. Therefore it is difficult for many to think of banking as an industry, subject to the same booms and busts as any other part of the economy. In fact, the banking industry, through central banking, controls the boom bust cycle and is the first to benefit from the ameliorative effects of easing. Thus it is, when the banking industry is salvaged during a downturn, the mainstream media begins to point out that a healthy banking sector presages a larger turnaround. It may or may not, but in any event a healthy banking industry within a fiat money environment merely illustrates that printing more paper money quickly during a downturn inevitably helps banks rebound.
Whether such Keynesian stimulation will help the rest of world as quickly or effectively is another story. We believe that if someone gave us US$700 billion in TARP funds, our balance sheet would tend to become magnificently healthy as well. But that does not mean the other guy's balance sheet will get fixed. The idea that by giving trillions to Western money center banks, the rest of the world's economy will benefit the other guy is a pretty amazing concept.
Here's the bottom line on all of this, so far as we are concerned — to be found not in the New York Times but in our favorite mainstream newspaper, the UK Telegraph:
Our gravest danger is a state-controlled 'false' economy … The Government seems to want to turn the market into a fiction which would not only fail to create wealth but would lose any sense of the real meaning of that term. Sorry to sound even more apocalyptic than my brother commentators (this isn't a contest, honestly) but the collapse of prosperity is not the gravest danger we face. The greater risk is that this crisis will be used as a pretext by government for taking control of the economy: what we may be looking at is a future in which the state creates the only possibilities for new employment, creates money at will and manipulates the real value of people's transactions for political ends. You would be right in thinking that we are on that road already. For the past decade, the Government has been engaged in a huge job-creation scheme to bring "opportunity" where it saw the need. There are now whole regions of the country where a majority of the workforce is employed in the public sector. And it has already begun to create money to fill the gargantuan hole that has been left not only by the lost fortunes of the delinquent bankers, but by its own profligacy.
Of course, the writer is commenting on the British economy, but we think the observations are just as pertinent when it comes to the American one — or the Western model in general. We will qualify the observations with our own previously stated perspective – that re-inflating the banking system does nothing especially good for the larger economy. Perhaps, the banks will start to deal among other corporate entities and the stock market will get a boost, and perhaps be further boosted by inflation, but all of this is a sideshow.
It is the mal-investment that remains a problem, some 30-plus year's worth of fairly intensive misalignment of resources, on top of another 70-years' worth of creeping mal-investment that signals the beginning of this round of fiat-money economics. The mal-investment is never really cleaned up, in fact, when the authorities re-inflate. That's why every round is worse. In this case, the overhang extends to derivatives, real estate and a variety of other mass-industries including the auto industry. The "real" economy isn't going to come back so fast this time, no matter how well the banks do.
The banks can do better, the stock market can do better – how can they not with all the paper money being printed? Ultimately, we think there is a considerable ceiling though, as the misery of the real economy will be a drag even on banks and the stock market. Consumers are in a saving, not a spending mode – though spending is a precondition for a fiat-driven economy – and there may be another wave of mortgage defaults. Then there are likely derivatives to unwind, maybe trillions. As markets rebound, if they continue to do so, price inflation will become an issue as well, weighing down the market along with it.
Anyway, whatever health the banking industry and the stock market can attain in this environment does not translate into a booming economy. Too many losses have been made elsewhere and too much has to be worked out. Since people do not necessarily understand the concept of mal-investment, nor perceive how out-of-whack Western economies really are, they will believe that it is merely a matter of a little more time before things get "back to normal." But in fact this latest economic crisis is further pushing the West toward a two-track economy. The first track is the paper-economy of banks, the stock market and the media (which reports on how well the paper economy is doing). Then there is the second economy of struggling families, tradesmen, small contractors with real jobs in industry, farming, mining, etc. It is the real economy that will continue to suffer significantly, even as the paper economy makes a potential comeback, limited though it may be. The lasting result of this latest economic crisis will be the further divergence of the paper economy and the real economy. It is happening now.
