Zach Goldfarb’s article on Wall Street’s runaway profits since 2008 doesn’t break a lot of new ground, it just slices and dices the Obama 2012 campaign’s new attempt to position their candidate as some kind of anti-Wall Street crusader.
The largest banks are larger than they were when Obama took office and are nearing the level of profits they were making before the depths of the financial crisis in 2008, according to government data.
Wall Street firms — independent companies and the securities-trading arms of banks — are doing even better. They earned more in the first 2 1/2 years of the Obama administration than they did during the eight years of the George W. Bush administration, industry data show.
Behind this turnaround, in significant measure, are government policies that helped the financial sector avert collapse and then gave financial firms huge benefits on the path to recovery. For example, the federal government invested hundreds of billions of taxpayer dollars in banks — low-cost money that the firms used for high-yielding investments on which they made big profits [...]
“There’s a very popular conception out there that the bailout was done with a tremendous amount of firepower and focus on saving the largest Wall Street institutions but with very little regard for Main Street,” said Neil Barofsky, the former federal watchdog for the Troubled Assets Relief Program, or TARP, the $700 billion fund used to bail out banks. “That’s actually a very accurate description of what happened.”
It’s amazing that this is only known intuitively – as seen in the Occupy Wall Street protests – and is not the only basic set of statistics every American should have handy to recite. The story goes that Wall Street destroyed the economy with excessive risk and inflation of a housing bubble, destroyed the lives and jobs of millions of Americans when it all came crashing down, got nursed back to health by a pliant set of government bureaucrats, spending taxpayer money to rehabilitate them, and now they are doing as well as or better than any sector in the economy.
In a kind of response noticed by Felix Salmon, Timothy Geithner had this to say:
“The central paradox of financial crises,” Timothy F. Geithner, the Treasury secretary, said before leaving for the Group of 20 meetings in Europe last week, “is that what feels just and fair is the opposite of what’s required for a just and fair outcome.”
It’s the equivalent of a pat on the head of his critics, telling them that they just don’t understand that government must shovel money to bankers in order for everyone to succeed. It’s based on a worldview where Geithner wakes up in the middle of the night and, instead of worrying about how America will survive without a middle class, he worries about how America will survive without Goldman Sachs.
Except this is all not true. As Goldfarb points out, a recent study by Ran Duchin and Denis Sosyura of University of Michigan shows that banks did not increase their lending after getting bailed out by the government after the crisis. Similarly, the economy did not come roaring back to life after the crisis; it’s now stuck at an unacceptable level of unemployment. Geithner’s response would be, as is now the fashion, to fall back on Reinhart and Rogoff, to say that it takes a long time to pull out of a financial crisis, and we just have to wait. The fact that a good part of Reinhart and Rogoff’s analysis is that financial crises lead to long periods of slow growth BECAUSE of the actions taken by governments in response, like propping up zombie banks who have a great degree of political power, doesn’t enter into the picture.
The larger point is that you have two opinions: one by someone like Barofsky, who says that government was single-mindedly focused on protecting the banks at the expense of ordinary people, and one by Geithner, who concedes that government was single-mindedly focused on protecting the banks but argues that it was the most fair thing to do. So thank Tim Geithner for your economy today.
