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Illusion, Reality, and the Quarterly Report

31 July 2009 Editorial
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Never has the disconnect between finance and the world of work been bigger, nor profit more deceptive. While workers are experiencing rising unemployment and falls in output not seen since the Great Depresssion.  Wall Street and global stock exchanges have detected more "green shoots of recovery" in the latest quarterly reports from the US banking sector.

What is behind Goldman Sachs' record USD $3.44 billion second quarter profit (on USD 13.76 billion in revenue)? According to the Financial Times, the results were powered by "Strong revenue growth in its fixed income, commodities and currencies business, and hefty underwriting fees from capital raisings."  Taking these in reverse order, what it really means is this:

Goldman Sachs benefited massively from a no-strings-attached bailout at public expense which pumped cash directly into their vaults while simultaneously giving them virtually free federally guaranteed credit on unsecured loans. US taxpayers directly reimbursed Goldman for billions in losses incurred with AIG, whose demise it helped bring about. Goldman and other leading banks helped design the government balance sheet "stress tests" and then negotiated the results which gave them a clean bill of health. Goldman then turned around and underwrote the equity issues which its less fortunate (and less well connected) competitors needed to remain afloat (the "hefty underwriting fees from capital raisings").

The enduring crisis has meant continued volatility in foreign exchange markets, fuelling speculation (the "currency business"). Investors fleeing investment in the real economy but hoping to surf an eventual recovery poured money into commodity futures, paving the way for the next devastating round of food price hikes (the "commodities business").

The global casino remains wide open for business, doped by public revenue. Goldman Sachs, if it stays on a roll, is set to pay out over USD 22 billion in end-of-year bonuses. So despite Gordon Brown's solemn announcement of an end to the era of unregulated free-market finance, it looks very much like business as usual, bonuses and all, with one key difference. With public money, financial institutions considered "too big to fail" have absorbed the most profitable bits of their failed rivals and are now even bigger

Accounting smoke and mirrors cannot sustain the financial sector indefinitely while the real economy continues to shrink. The clock is ticking on a mountain of debt, including massive credit card and other consumer debt which can only deteriorate further as unemployment climbs.

Strip away the fanciful forecasts and the fantasy valuations of "toxic assets" and global finance remains no sounder than it was a year ago. Large quarterly profits at JP Morgan Chase, Bank of America and Citigroup (the last two of which flunked the "stress test") were based on asset sales and creative accounting. European banks have managed to conceal the worst by writing off only a limited portion of their bad loans and securities. The European Central Bank recently estimated that eurozone banks face cumulative losses for 2007-2010 of a staggering €649 billion. The forecast may prove optimistic; as the Financial Times recently noted, most European banks "employ aggressive accounting practices that may mask their true financial condition."

None of the billions and even trillions of dollars of public support has found its way into real investment in factories, offices, research or infrastructure -  investment which generates employment and feeds families. Since January, according to the European Central Bank, the rate of growth in bank lending to manufacturing and services has been halved. Much of the money dished out to the financial sector is simply being parked back at the central banks' own lending facilities in the EU, US and UK, all of which report record inflows of overnight deposits even as finance ministry officials and heads of state beg and plead for the banks to start lending.

None of this should come as a surprise. Vast sums of public money were handed to the banks by governments which consciously renounced using existing tools at their disposal to direct the money into productive investment. It is not too late to change course. The Obama administration in June allowed ten leading banks which had benefited hugely from public support to pay back the loans and wriggle out of restrictions on bonuses and other inconveniences. It could still, through a variety of means, influence their operations. As we saw in the case of Goldman Sachs, access to federal credit is still a vital lifeline to cheap money for the banks. And governments everywhere will be compelled to maintain and expand their existing ownership stakes in failing financial corporations as the banks go on generating losses. Unions must demand that they use their whole or partial ownership to enforce investment policies which can benefit the working people who are paying for the bailouts.

Goldman Sachs and the latest quarterly report madness show, first, that unless governments are prepared to use their financial support for a tottering financial sector as an instrument of public policy rather than a tool for transferring public wealth to private hands, they are simply laying the ground for the next speculative bubble. Second, the crisis in consumer credit is being exacerbated as companies slash jobs and investment to squeeze returns out of stagnant or falling sales. Employment and the crisis in the financial sector are therefore intimately linked. It follows from this that strengthening, not diminishing, the wages and employment which anchor real, not financial growth, offer the only way out of the crisis.