Put a Steak* Through It's Heart

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We See the problem here

The good folks at Bloomberg, no group of raving socialists have some graph pr0n.

What they are showing is something very basic: That when profits (and not stated, remuneration) in the financial industry skyrocket, this is not a sign of health in the economy, this is a sign of sickness.

It means that enormous amounts of resources are being redistributed to non-productive activities, essentially bankers shafting their customers and pocketing the difference:

In July 2008, [Deutsche Bank AG strategist Jim] Reid said that U.S. banks had made “excess profits” of about $1.2 trillion in the previous decade, compared with how much they should have made based on economic growth, and that those excesses would be wiped out. Since then, U.S. financial firms have written down the value of their assets by about $1.15 trillion, according to Bloomberg data.

“We are now all well aware that rather than overhaul a financial system that arguably contributed to the problems of the last two to three years, the authorities have created the conditions for the industry to thrive,” Reid wrote this week. “Only time will tell how the regulators and politicians will decide to address these imbalances.”

In any case, I spotted it on Kevin Drum's blog, and he found it at Paul Kedrosky's blog, but he begs to differ with Mr. Kedrosky's analysis.

You see, Mr. Kedrosky's thesis is that with rates at 0%, and the finance industry still not supplying the lubricant that keeps the economy moving particularly well, that even bad bankers can make a profit.

Mr. Drum, and I agree, sees the role of the bankers somewhat differently :

Wall Street is only full of bad bankers if you think the role of bankers is to provide efficient financial services to the rest of the economy. If you adopt the more correct attitude that the role of bankers is to make lots of money for bankers, then America has the best bankers in the world. And they're proving it yet again.

(emphasis mine)

This is, of course the problem: What is good for the banks is increasingly bad for the country, which is why the finance industry, and all of the FIRE sector (Finance, Insurance, and Real Estate) needs to be shrunk back to historic levels of society.

Until one of the goals of regulation is a recognition that the FIRE sector is basically parasitic once it expands much beyond the bare minimum required, then part of the solution is to shrink it, and this needs to be an explicit goal of any new regulatory regime.

^*It's a reference to Damon Knight's (very) short story eripmaV. Read the story, or buy the T-shirt with the story printed in full on it.