The Synthetic Recovery – Wall Street banking success dependent on destroying the productive sectors of our economy.

I’m certain that many of you are taking a glimpse at the bread and circus Goldman Sachs hearings.  At one point in the hearings, an attempt to define derivatives came up.  Yet when the Goldman bankers tired explaining their derivative bets, it came out as contempt for the public and representatives.  They rather not explain it and keep it purposefully dark because this is how they keep the public in a state of confusion; many derivatives were designed to be profitable by destroying the real economy.  The bet in question was placed by hedge fund billionaire John Paulson who made a gigantic bet that the housing market would implode.  The bigger issue at hand is that Paulson with the help of Goldman Sachs was able to choose what kind of toxic mortgages were placed into the actual bet.  Goldman then sold securities to investors who ended up losing money on the bet.  In other words, the game was rigged from the beginning and not every player had all the available information.

But a more important question not being asked is how in the world does any of this add any benefit to society?  The homeownership rate is now back to the level in 2000, wiping out the entire decade of supposed gains.  Congress should be asking what kind of benefit society gains from people placing bets so large, that when they collapse only a massive taxpayer bailout will cover one side of the promise.  Banking has gone away from a sensible purpose of allocating capital to the most efficient and productive sectors of the economy to one in which Wall Street is now one giant taxpayer funded casino leeching capital from more productive sectors.

To highlight this massive disconnect, let us look at some indicators of this “recovery”:

Source:  Federal Reserve

The current recovery is the slowest on record (at least if we measure it by employment growth).  Why?  Because even after a stunning 80 percent stock market rally, employment hasn’t budged.  Most of the money was funneled into Wall Street and stayed there.  Why do you keep seeing every too big to fail bank announce record breaking profits even though foreclosures and bankruptcies are still near their peak?  Give any industry trillions of dollars and what else do you expect?  Even if we look at industrial production, this recovery isn’t being felt by the middle class that actually produce goods:

At this point in previous recessions, we would start seeing a much stronger move to the upside with industrial production.  That is clearly not the case with this recovery.  There are only so many yachts Wall Street bankers can purchase at any given time.  But the middle class is feeling the pinch even deeper because incomes are stagnant:

“(WaPo) Some would say there is a recovery taking place,” Duke said during a meeting with Washington Post editors and reporters. “The lower-income and middle-income customers . . . they still feel the pressure.”

In addition, he said that the weak housing market continued to hold back the recovery in states such as Florida and Nevada. During the boom years, many jobs in those states were fueled by a surge of construction that has since abated, drying up the demand for labor.

“It will take housing to create some of those jobs,” Duke said.

He said shoppers are still trading down in food purchases, and the company’s internal research shows that the percentage of mothers who report job security and availability as a top concern has risen 5 percent since January. The world’s largest retailer has responded to the pressures on its customers by keeping a laser-like focus on prices, most recently slashing prices on roughly 10,000 products across its stores.

“That’s just an area we will not give an inch on,” Duke said.”

Those feeling the pinch represent the largest segment of our population.  This stems from the fact that income for the last decade has been stagnant:

Actual income is still moving near the bottom of this business cycle.  So a store like Wal-Mart will see this showing up in their daily purchase reports.  People are being extremely careful with the money they have because the recovery is weak.  And more of the money is flowing to banks for continuing this gambling casino.  A casino is an apt comparison.  You are betting on a made up game, nothing tangible is being traded with many derivatives and these are the most toxic.  One of the more direct comparisons sums it up nicely:

“(AlterNet) Even if he stands to make a buck at it, even your average used-car salesman won’t sell some working father a car with wobbly brakes, then buy life insurance policies on that customer and his kids. But this is done almost as a matter of routine in the financial services industry, where the attitude after the inevitable pileup would be that that family was dumb for getting into the car in the first place. Caveat emptor, dude!”

But banks are back to going all in on the taxpayer funded roulette table:

“(Money Morning) Goldman Sachs Group Inc. (NYSE: GS) just reported  that its first-quarter earnings nearly doubled to $3.46 billion, the investment-banking giant’s second-most-profitable quarter since going public a decade ago.

JPMorgan Chase & Co. (NYSE: JPM) recently said its first-quarter earnings came in at $3.3 billion, up 55% from a year ago.

And Bank of America Corp. (NYSE: BAC) reported that its earnings for the first three months of the year rang in at $2.83 billion.”

All this is happening while multiple states in the U.S. face billion dollar budget deficits.  All this is happening during a time when last month, we reached a foreclosure filing record.  All this is happening when other countries like Greece are reaching the apex of crisis.  The middle class is ultimately paying for this experiment in banking and it is working for their bottom line.  But are things really better?  Or a better question, was money allocated in the best way for the benefit of society?  Do you have any confidence in the current system?  Nothing has really changed since the crisis started.  The big bet banks are placing right now involves the American people forgetting what happened over the last decade and allowing it to continue once again.

If you enjoyed this post click here to subscribe to a complete ad free feed.

Popularity: 2% [?]