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October 27, 2014

What’s Wrong with JP Morgan Chase & Wall Street’s Big Bank Earnings? Lots

Dennis Kelleher

The handful of the biggest too big to fail banks — that still threaten the US financial system, economy and taxpayers due to their size, interconnectedness, lack of equity and high risk trading activities — are reporting third quarter earnings this week.   Based on the early reports from JP Morgan ChaseCitigroup and Wells Fargo, those banks are doing well.

But, don’t let that fool you (and don’t forget they were all doing marvelous in the years before they collectively crashed the global financial system in 2008).  The reality is that things are not good.  In fact, these big bank earnings are misleading and mask deep underlying economic problems that are hitting Americans hard.

First, the focus on the handful of Wall Street’s too big to fail banks (about 10 out of almost 7,000 banks in the US) and their earnings turns the economy upside down.  Banks, the financial system and financial markets exist to be the funding mechanism for the US’s innovators, entrepreneurs and businesses at all stages and of all sizes.  These markets are supposed to be servants to and support the real economy that invents, builds and distributes goods and services which fuel employment, growth and standards of living — improving lives, communities, our country and the world.

To steal a phrase from Goldman’s Lloyd Blankfein, innovators, the imagination economy and the real economy do God’s work:  seeing and creating the future, while founding and growing companies, employing hundreds if not tens of thousands, and propelling economic growth.  All of which lifts up America’s workers, families, and communities.

Second, if bank are doing what they are supposed to do, then their earnings should directly relate to the conditions of those workers, families and communities:  they should result from lending to, for example, people wanting to buy a house or car and businesses large and small that want to start up or grow.  That bank customer demand should lead to higher earnings if they are lending and not just engaging in high risk gambling and reckless trading.

However, there are still to many Americans suffering from the economic calamity caused by the financial crash of 2008 to provide demand for bank lending.  About 70 percent of all the goods and services produced in this country (our GDP) are driven by consumer demand, which depends on economically vibrant workers and families.  However, today, there is little evidence of consumer demand, and, unfortunately, for too many reasons.

There is an employment crisis in this country:  un- and under-employment remain at historic highs.  While the top-line unemployment number has come down, that is largely due to the large number of workers dropping out of the labor force (and thereby lowering the unemployment rate which is a percentage of the so-called participation rate).  Tellingly, even using that incomplete measure, unemployment has returned to pre-recession levels in only five states.

Making matters worse, almost 20 percent of homeowners in the US are underwater, meaning their mortgages are higher than the market value of their homes.  Indeed, almost one-third of all homeowners are “effectively” underwater because they have so little equity that selling their home without a loss after costs would be difficult.  In addition, real median net worth has collapsed from a high in 2007 to levels not seen in roughly 25 years  (1989).  Lastly, US workers’ paychecks have stagnated.  Thus, to the extent that the financial crash didn’t wipe out, directly and immediately, whatever savings people had, there’s little if anything left for US families to save or spend after paying the bills.

All of this means that America’s workers and families are under enormous and ongoing economic stress.  That should surprise no one.  The 2008 financial crash was the worst since 1929 and it caused the worst economy since the Great Depression of the 1930s.  Indeed, Ben Bernanke, the former Chairman of the Federal Reserve Board, recently said that the 2008 financial and economic shock was even worse than the Great Crash of 1929.

The focus needs to change from the earnings of Wall Street’s too big to fail banks like JP Morgan Chase, Citigroup, and Goldman Sachs to the economic insecurity that is the reality of too many American families and communities on Main Street.  That is why stagnating worker payindefensibly high inequityhistorically high unemployment, an ongoing housing crisis and so much more must become a priority of policy makers and the media.

If you’re concerned with the condition of Wall Street’s biggest banks, then do something about America’s struggling workers, families and communities.  Change that and the biggest banks — and the country — will thrive along with them, rather than pose a lethal economic threat to them.



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