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Jon Talton

Analysis and commentary on economic news, trends and issues, with an emphasis on Seattle and the Northwest.

July 13, 2009 at 10:12 AM

Why Goldman’s profits are a sign of continued economic trouble

Top of the News: A new government report shows that the number of homeless families rose 9 percent between 2007 and 2008 — and 56 percent in rural and suburban areas. All this before unemployment and foreclosures really gathered strength starting last December. I’m sure these folks, among millions of others, are gratified that things are looking up at Goldman Sachs.

Analysts are expecting second-quarter earnings of $2 billion from the investment bank when it reports Tuesday. Huge bonuses for top executives are sure to follow.

Yet happy days are not here again. Goldman’s quick rebound, after its being saved by taxpayer TARP money, shows how the system remains sick. It epitomizes the institution so huge that it presents a systemic risk to the economy — and one so politically connected to both parties that it can not only veto reform, but effectively dictate administration policy.

Like much of Wall Street, its profits are disconnected from the actual productive economy. In many cases, the two are at odds, as big investment banks reap fees from creating mergers that will kill jobs and competition. It also played a leading role in the dangerous, exotic investment “vehicles” whose implosion led to the crash and wiped out many retirees.

In the Great Depression, the Pecora Commission exposed the frauds and wrongdoing on Wall Street, leading to major new regulation and legislation, especially the Glass-Steagall Act, that fended off depression-causing swindles and excessive risk-taking until it was repealed in late 1990s. The “banksters” who caused the crash were exposed and in some cases forced to resign.

This time we have had nothing like a Pecora Commission, seeking to discover the causes of our crash, hold people accountable and put in place rules of the road to prevent a recurrence. Indeed, most of the major players are still standing, and profiting just fine (remember how Goldman not only got TARP and Fed money, but double-dipped from AIG?).

Meanwhile, unemployment is headed for 10 percent and the shaky edifice of financial plays that caused it remains. At this moment, little-known CIT Group — a lender to almost 1 million smaller businesses — is trying to avoid a bank run.

Today’s Econ Haiku:

A Web-based Office

To compete or copy cat?

Did I say it’s free?

You can check out the winner of last week’s haiku contest here.

Comments | More in Bailout, Banking

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