Commentary

Goldman Thrives while CIT Dives

There were some big stories in the bizarre world of finance this week, and decent profit reports from some of America’s largest companies. The good news about earnings helped promote a sense of calm, as thoughts about last year’s financial crisis faded into distant memory. I will focus today on two developments that I found most interesting, and to be honest, most troubling. The first is the staggeringly large amount of money that Goldman Sachs earned in the last quarter. The second is the failure of CIT, a large lender to over a million small- to moderate-sized businesses, mainly in the retail trade. The reason that these two stories are of great interest to me is because there is an unnatural selection process occurring in the world of finance. It is unnatural because the federal government is choosing which struggling banks and investment firms will survive, and which will fail. Both Goldman and CIT received TARP funds last year, but the former is tied to the global capital markets, the latter makes loans to small and mid-sized businesses.

The view that healthy global capital markets are the key to the resurrection of economic growth has guided American fiscal policy designed to deal with the nasty consequences of the financial crisis. Federal Reserve Chairman Ben Bernanke still pounds the table before Congress to preach that credit must flow at all costs, no matter what misery the remedies may bring to future generations. This attitude is a symptom of the diseased belief that credit is the prime driver of the economy. Historically, the financial industry served the needs of the economy, providing both investment funds and useful capital market innovations that allowed important new industries to prosper, raising productivity and living standards for millions of Americans.

Over the past few years, however, the financial industry served only itself. The largest commercial and investment banks contributed the lion’s share of profits paid out to shareholders invested in American stocks, and provided countless high-paying jobs all over the country. During this time, the financial industry grew way too large in proportion to the overall size of the U.S. economy. There is now a desperate need for it to downsize and restructure.

After a massive financial bailout, loan guarantees and quantitative easing by the Federal Reserve, the financial industry is off to the races again, or so it may seem. Goldman Sachs raked in $3.44 billion last quarter, which is a record amount, surpassing profits earned in the heyday of the recent credit bubble. Goldman was not the only investment bank to earn money last quarter, JPMorgan Chase, Bank of America and Citigroup all reported profits for the period (the last three are involved in both commercial and investment banking). Granted, a large chunk of the profits at Bank of America and Citigroup were due to more favorable portfolio valuations and asset sales, but the message sent to the public seems to be that the financial services industry is back on track again. But it is not. This bloated sector is far from out of the woods. Last month, the economy was hit with a record number of foreclosures, weak retail sales and the loss of another several hundred thousand jobs, yet in the fantasy land inhabited by analysts and over-paid financial media personalities, all is well because the banks are in the black again.

This strain of delusional thinking brings me to CIT. The CIT Group provides credit to small and mid-sized companies, with many customers in the struggling retail sector. The feds ran to its rescue last year, disbursing $2.33 billion in TARP funds to the dysfunctional lender, but the line has now been drawn for CIT. It is in desperate need of funds, but the government’s window has been closed. CIT was deemed too big of a problem, but not too big to fail. Without federal backing, private investors will not lend CIT the funds it needs to survive, and the company will end up like Lehman Brothers, in bankruptcy court. The difference between CIT and it’s Wall Street cousins is that the former lent money to smaller companies, and was not inextricably linked to global capital markets. I guess the feds figured that the failure of struggling retailers is something that the economy can easily digest.

I beg to differ. Although I am not a proponent of bailing out incompetently run firms, I think that the Federal Reserve and the Obama administration’s focus on protecting the flow of credit to the largest financial companies only prolongs the adjustments that need to be made. Banks got too big, they need to downsize. The bailouts and loan guarantees to the largest financial players do not induce them to clean up their acts, it merely rewards bad behavior. And, it will stifle competition and raise the cost of credit for consumers by leaving only a handful of government-backed banks to dominate the industry in the years ahead.

The awful consequences of the worst recession since the Great Depression, such a rising unemployment, an explosion in foreclosures and the failure of countless small businesses is not being addressed forcefully enough. Diverting borrowed trillions to revive reckless financial giants doesn’t help the millions of people outside of finance find a job or stay in their home. It reinforces the idea that the few who are politically connected can earn billions while the rest of us shoulder the losses when their schemes fail, and it sets the stage for the creation of an even bigger and costlier mess that will have to be cleaned up later on.

Here are a few good articles related to Goldman, CIT and the economy in general:

Goldman Sachs Reports Big Profit, Beating Forecasts

Goldman’s Gain, America’s Risk

CIT Shares Plunge After U.S. Denies Aid Request

When to Let a Bank Fail

Geithner to assure Mideast investors

Retail sales remain weak

Report: Record Foreclosure Activity in First Half

Foreclosure Filings Hit Record 1.5 Million; One in Eight Americans Delinquent; Obama’s Mortgage Rescues Create ‘Confusion’

I also host a Cartoon Caption Contest on Mondays, and I have brand new original cartoons for you every Wednesday.

Check out more cartoons and the winners of the caption contest in the Splendid Marbles Cartoon Gallery.

Click here for the Splendid Marbles Cartoon Caption Contest.

While you’re here, sign up for my feed so you can get some of the best in original political cartoons and commentary

© 2009 Splendid Marbles.