Trading profits, not banking operations behind bonuses

Paul Krugman:

It was the best of times, it was the worst of times. O.K., maybe not literally the worst, but definitely bad. And the contrast between the immense good fortune of a few and the continuing suffering of all too many boded ill for the future.

I’m talking, of course, about the state of the banks.

The lucky few garnered most of the headlines, as many reacted with fury to the spectacle of Goldman Sachs making record profits and paying huge bonuses even as the rest of America, the victim of a slump made on Wall Street, continues to bleed jobs.

But it’s not a simple case of flourishing banks versus ailing workers: banks that are actually in the business of lending, as opposed to trading, are still in trouble. Most notably, Citigroup and Bank of America, which silenced talk of nationalization earlier this year by claiming that they had returned to profitability, are now — you guessed it — back to reporting losses.

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But there’s an even bigger problem: while the wheeler-dealer side of the financial industry, a k a trading operations, is highly profitable again, the part of banking that really matters — lending, which fuels investment and job creation — is not. Key banks remain financially weak, and their weakness is hurting the economy as a whole.

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What this suggest is that the traders are on the correct side of a bet against an early recovery. In fact their trading profits probably give the banking side the ability to stay in business at this point. Traders make a profit when they correctly predict the direction of a market. That should be a real concern for the administration and not the fact that these bankers are making a profit.

If that were a concern, they would also be complaining about people who are showing big returns from investments in gold. These investments also do nothing to produce significant jobs or productive enterprise. Yet, several companies are advertising heavily because some investors see gold as a safe investment against current government policies. The fear of run away debt is motivating the investments. That is something that Krugman is probably not concerned about, but he should be.