The Unsustainable US Financial Sector

According to Bloomberg, the vast majority of the Big Five banks’ profits consisted of a taxpayer subsidy — the Too Big To Fail guarantee. If the Too Big To Fail banks had to lend at the rates offered to their non-Too Big to Fail competitors, their profits would be severely shrunk (in some cases, to a net loss):

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What does that mean?

That means that the American financial sector is a zombie, existing on the teat of the taxpayer.

It means the huge swathes of liquidity spent on saving the financial sector are ultimately good money chasing after bad.

As Bloomberg notes:

The U.S. financial industry — with almost $9 trillion in assets, more than half the size of the U.S. economy — would just about break even in the absence of corporate welfare. In large part, the profits they report are essentially transfers from taxpayers to their shareholders.

Neither bank executives nor shareholders have much incentive to change the situation. On the contrary, the financial industry spends hundreds of millions of dollars every election cycle on campaign donations and lobbying, much of which is aimed at maintaining the subsidy. The result is a bloated financial sector and recurring credit gluts.

This is extremely prescient stuff. The Fed since 2008 has reinflated the old bubbles, while allowing the same loot-and-pillage disaster-corporatist financial model to continue.

It is insane to repeat the same methods and expect different results. This credit glut, this new boom that has seen stocks rise closer and closer to their pre-crisis high (which may soon be exceeded) will just lead to another big 2008-style slump, just as the Fed’s reinflation of the burst tech bubble led to 2008 itself. This time the spark won’t be housing, it will be something else like an energy shock, or a war. Something that the Federal Reserve cannot directly control or fix by throwing money at it.

America (and the Western world in general) post-2008 needed real organic domestic growth built on real economic activity, not a reinflated bubble that let the TBTF financial sector continue to gorge itself into oblivion. 

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33 thoughts on “The Unsustainable US Financial Sector

  1. You can be assured that everybody knows what’s going on when Bloomberg “exposes” the blatantly obvious.

    Perhaps TPTB are thinking that now that they have given the 1% their food stamps [stock market ramp], it’s time to confront the reality that this version of the party is over.

  2. Quesion, Imp: Are you accusing Bloomberg of being part of the scam? I know the mayor himself is crooked as a snake, but is the ompany?

    • What I am saying is that when the main stream media reports anything “anti-system,” you better believe that the horse has been out of the barn for a long, long time. In other words, no damage can be done by the revealing; the profits have been taken, all tracks covered, etc., etc., etc.

      It’s like how the government doesn’t allow the real story to come out until most everybody involved is dead [75 year deal].

      All systems are about lying, cheating, and stealing. Those within rationalize it all kinds of ways, as do those with-out.

      • Thanks, Imp, for your clarification of a very important (and politically INcorrect, i.e., truthful!) observation! I just read that Hollywood is going to try to rehabilitate Jimmy Carter with a movie falsely making him a hero in a rescue operation. (Well it worked, didn’t it, with Obama’s personally disposing of Osama bin Laden, with minor assistance from a decade of intelligence work and a few Navy Seals?)

        But possibly the best example is the rehabilitation of Bill Clinton (Hillary too, another story). The poster boy for cocaine importation and use, serial adultery, and sexual harassment; convicted and disbarred for perjury; and only the second US president to be impeached, is now the most popular political celebrity!

        On the whole, do the American people deserve our heritage of liberty? Certainly not the sacrifices of our armed forces!

        Thanks also, Aziz, for evaluating Bloomberg. I should have known from John Mauldin’s willingness to be an occasional guest on their TV network.

        • “On the whole, do the American people deserve our heritage of liberty?”

          Last time I checked, nobody asked me whether I wanted to be being a citizen and fork-over half of my labor-value earned. Did anybody ask you?

          I fear the liberty you allude to might be better termed, less tyranny, and, as with all things, comes and goes.

        • Imp: Nobody asked me, nor forbade my emigrating (except my wife). My “leading” question is intended to suggest that drastic last-resort solutions, e.g., secession, are justified.

        • Perhaps, this [succession] will come to pass, but, as has always been the case, the only way to attain true liberation is within.

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      • The producers are now controlled by the financial service institutions. The service economy is anthropic. Western culture sees the economy as portrayed by politicians through the lens of corporate media and a majority of people now believe that the economy is the way it is because if it were different they would not be here to observe it.. They think they owe their existence to one or the other. It may not look like 1930’s Fascism but it certainly is a dangerous synergy.

        • Aziz’s reply to El Zombo immediately below this one is a link to “A Diocletian economy”, which is a May 1, 2012 post by Aziz named “Krugman, Diocletian & Neofeudalism”; in THAT chain, a tad over halfway down, is an Aziz reply, “Ron Paul Tzu”, with a link to an article of the same title. The Aziz post is great, but the “Tzu” article is one in a million! Two millenniums before Washington (“avoid foreign entanglements”), Jefferson (“the best government is that which governs least”), and Orwell’s “Newspeak”:

          Sun Tzu (legendary war strategist): “Unless endangered do not engage in warfare.”

          Lao Tzu (Taoism): “So long as I act only by inactivity the people will themselves become prosperous.” Meng Tzu (heir to Confucius): “A wise king will lead, not rule, the people.”

          K’ung Fu Tzu (Confucious): “When words lose their meaning, people lose their liberty”.

          BTW — Tzu means master or sage.

        • Yes, I am a follower of Sun Tzu, Lao Tzu, Kung Fu Tzu. I wish modern China’s political and social philosophy was more grounded in the work of those philosophers.

  4. One of the primary advantages of being older, is perspective. When you are young, you see things and say to yourself, “This is obviously the problem, so why isn’t somebody doing something about it?”

    Well, as you get older, you begin to view the problem differently. In dribs and drabs, you see that, “the problem,” is not everybody’s problem. And, as a matter of fact, the problem is some people’s golden goose. Then it becomes easier to understand why some problems are never fixed.

    Business often divorces itself from morality in its never ending compulsion to anesthetize itself in theory and mathematical formula. Just as in war, the main players can take solace in the fact that, 1 + 1 [still] = 2, rather than face the God-awful truth that five hundred people were just slaughtered, or that the next generation’s living standards must go down to support the crumbing economic facade.

    The truth of the matter is something few are truly willing to confront, as it mutilates all the fairy tales will still hold onto throughout our adult lives. Sooner or later, though, we must confront the harsh realities, just as we must do as individuals when we must face the great questions of life and death.

    Systems are what they are, sometimes able to improve the lot of the common person, but more often than not, defined by the most anti-social and avaristic among us, those willing to do whatever it takes to feel as if their lives are worth living.

    • Imp old friend, I’m a lot older than you. I’ve also seen a lot of what you describe, but way more in government than in business (or in the disciplined professions, which excludes modern media, entertainment, and educators in fields other than science, math, etc.).

      • [BIG] business and government [seems to me], are a two-headed monster. The government is sort of like the artillery that pounds the enemy [small business and consumers] with never ending rounds of rules and regulations, fees and taxes, etc., softening up the enemy for the regulars that come in with lethal advertising and other forms of deception, restraint of trade strategies, selling below cost, and all the rest, in an effort to enslave the population by eliminating from the majority, the opportunity to embrace financial freedom through participating in a near-free market for their goods/services.

        • You blunted my argument, Imp, when you wrote “BIG” business. Nevertheless, government is THE biggest player in so many games and the SENIOR partner in the your “two-headed monsters”.

  5. There is a level of comfort using capitalism vs socialism to discuss the current state of economics that may be superficial. I believe we are observing a Third Position economics that has declared capitalism and socialism obsolete somewhat like the post WWI movement that set the stage for WWII. The redefining of age and gender roles, reliance on the education system to indoctrinate the young, unprincipled opportunism by politicians, ideological dishonesty and the growth internationalism have set a stage.

    Technology has eclipsed wisdom (technology as the new god), knowledge has been overwhelmed by disinformation (the president is the most competent being on the planet) and information is predigested by search engines ( Bing! top ten results).

    Fear of environmental catastrophe (the “Green Movement” vs the “Greenback”) has redefined the need for real economic growth, success and freedom as decadence and unites a broad segment of world views into a simplistic, flawed philosophy of good vs evil.

    The new economics is limiting growth to the margins. It is no wonder that current monetary policy and political agendas continue to re-inflate the same old bubbles, create shortened business cycles that destroy more wealth than is created, benefit only a few. (85% of global trading is computer generated with models that milk the margins)

    It appears to me that capitalism now willingly marches over a cliff, is content to be defined by those who oppose it and rewarded by those who choose what is TBTF.

    I often chuckle when you elude to pending economic disaster knowing full well your facts are real and your scenarios are likely.

    • @ El Zombo “I often chuckle when you elude to pending economic disaster knowing full well your facts are real and your scenarios are likely.”

      The scenarios are possible, only because the game is manipulated by a few men. I love watching both the Main Stream Media, and alternate realities such as this site and others. It gives you psychological perspective. What does the common man read, watch and therefore think.

      I sometimes wonder if these alternate sites soften the psyche of the financially savvy herd, so when it does crumble everybody assumes this is the BIG ONE. It is like the game of musical chairs, we all know it is going to stop, but WHEN? Massive rush to the gates, far quicker than the average retiree can react.

      The ones in the MSM spotlight will be scratching their heads saying what happened? (50% or more wealth wiped out)

      This should have happened in 2007. Instead, the Taxpayer – future generations – wore the pain. This money print festival has only bought time for the well connected.

      • Buddy: Do you mean the common working man or the ubiquitous sheeple. To paraphrase Descartes on the latter, “I don’t think, therefore I am fat, dumb and happy!” Or Thomas Gray, “Where ignorance is bliss, ’tis folly to be wise”.

        • Both. It is a vastly different world reality to those who don’t seek out truth. A lot of people will be shocked.

          Can you imagine the knowledge of those who knew about sub-prime and shorted the market, once it reached the headlines. Or those who knew the Fed would print to infinity, therefore buying hard, with leverage when Greenspan went on 60 minutes (The average person watches 60 Minutes) and said there were “green shoots”.

          My senses are tuned into the information that the common man sees. In Australia house prices are looking firmer. Interest rates are low, so that tells me the common man will jump before prices rise. This fuels a bubble. We see it in equity markets. People never want to miss the train. All aboard, even if the wheels have cracks.

  6. Sorry but the chart is hardly evidence. Taking a banks total liabilities and calculating the impact of 80bp change. It is assuming that all their liabilities are funded by govt? The assets earn income offset by liabilties cost. You can hardly tweak one independently and you can hardly assume that 100% off the liabilities would necessarily increase by 80bp even if the govt subsidy went away. This is typical sloppy thinking dressed up as intellektual. Given their laser like understanding the author of the research should be an economist…

    • Hang on, I have worked in Banking, in Treasury, without government support, the banks would have had to pay more for funding. The market would have imploded, and those with capital would have demanded higher rates to keep their cash with the entity.

      What Aziz says is correct. Zombification is a fact.

      I would have loved to have known which banks would have failed due to inept Management. Without Fed support.

    • rob, I am returning to the Bloomberg perspective to make points (my people left England in 1625) but agree that the charts and articles standing alone do not prove the conclusions of the author….. I do not believe that was the intention… When you add the real world observations of US banking crisis and the role government played, the scheme has clarity.

      Government mandated mortgage lending guidelines opened the door for sub-prime.
      Threats by government regulators to limit/reduce fees, penalties and rates on consumer banking services (checking/credit card) closed the door on this profitable segment.
      Negotiations on risk sharing of looming student loan default crisis. (government picked up largest share of risk)
      Unfunded pension liabilities/401K crisis (large part of assets invested in bank stocks due to lack of real economic growth and hangover from tech bubble burst)
      Vilification of the banking industry/ Politicians unwilling to publicly acknowledge their role.
      Over stating the crisis making an International meltdown a reality.

      As is usual governments tend to pass legislation with two things in mind, is it politically correct and does it sufficiently cloud the real issue. Subsidies are also used for two main reasons, to create the appearance of success and as reward for keeping the myth alive.
      When you add in that 50% of Americans think the European model is nirvana, don’t pay income tax and that the government plays the game with monopoly money, (I really do mean that the Federal reserve is a monopoly) the temptation for the financial services segment to play along are overwhelming.

      At a time in history when many believe that capitalism and socialism are both obsolete, I believe we are in the beginning of a third tier economic theory yet to be fully defined. It seems to me that reality and “intellektual” need for universal answers has forced economist into the realm of cosmology (this is one game level up from the witchdoctor class).

      Wanting to be on the cutting edge I have given it a name and definition I stole from the Stephen Hawking book, “A Brief History of Time”.

      Anthropic Economics: (has a nice ring to it, don’t you think). We see the economy the way it is because if it were different we would not be here to observe it.

      take care and keep thinking

      • Guys, I’m not arguing against the wrongs of artificial banking support and the stasis it has induced; in other articles by Aziz I have advocated quite radical remediations as being the faster way out of this situation. But, I do get ticked off by sloppy charts produced to “prove” something which doesn’t in itself standup. Intellectual rigour, completeness, accuracy are what we should use to make sound arguments. Sadly this was lacking here and I called it out.

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  10. Remarkable issues here. I am very glad to peer your article.
    Thanks a lot and I am having a look forward to contact you.
    Will you kindly drop me a mail?

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