The Federal Reserve Bank of New York reported last week that Gotham’s econ omy is back. Problem is, what’s keeping us afloat is the Fed down in DC, which has taken extreme action to juice up the US financial industry — and thus New York. Those measures can’t last forever. And when reality hits again, it will be uglier than ever.
The supposedly good news: Our recession was “deep” but “surprisingly short” compared to the nation’s. Local Fed chief William Dudley noted that the city economy added jobs this year even as the nation and the state lost them.
The details are less happy: Dudley warned that hiring had slowed in June, and that recovery will be “bumpy.” Yet it’s a safe bet that New York pols will still use the good news as an excuse to get the party on again.
Yes, on the surface, New York has weathered the last two years well. To stave off financial-sector collapse, Washington has deployed trillions of dollars in guarantees and cash across Wall Street. Most obviously, the Fed’s zero-percent interest-rate policy allows large financial institutions to borrow nearly for free and use the cash to push asset prices up, taking the profits.
Thanks to Fed chief Ben Bernanke and Treasury Secretary Tim Geithner, last year, the city’s securities industry made $61 billion in profits — $17 billion more than in 2004, 2005 and 2006 combined. Wall Street, while 30,000 people short of its peak, added 2,000 jobs in the last five months.
Washington’s money shower helped the city turn a projected $4.9 billion deficit into a $3.9 billion surplus for the last year. The take from the personal-income tax (which depends heavily on Wall Street’s hefty pay) came in more than a billion dollars over forecasts, nearly reaching 2006 levels (when the subprime bubble was still peaking). Banking profits were double the forecasts.
But the Fed has done such a thorough job of pumping money into big financial institutions that there is nowhere for their assets to go but down — or for inflation to take off and hurt them and the city, anyway. Last week, Goldman Sachs reported a profit fall of 44 percent from the same time last year, even after taking into account one-off charges like its SEC fine. As Goldman’s CFO said, things are “pretty slow.”
In other words, New York isn’t enjoying a genuine “recovery” — but a renewed vacation from real life, on someone else’s dime.
The comedown will be hard. New York initially faced a budget imbalance of 4 percent last year. In three years’ time, that deficit will have grown to 9 percent. And without a continued surge in income-tax revenues past their 2008 bubble peak, the numbers will be worse.
Long term, Wall Street is going to be less profitable than in the bubble years, or the current super-subsidized boomlet. The city economy can survive that — provided City Hall and Albany first get used to spending a lot less money.
Otherwise, the city will be stuck paying retiree benefits even as it can’t afford to pick up the garbage and police the streets. Costs for long-term retiree, debt and health-care obligations, as opposed to day-to-day operations, recently became more than half of city spending; in three years, they’ll be nearly 60 percent.
Washington money is keeping the private sector from helping the city heal, too. Walk around core Manhattan, and you see dozens of new high-rise condo buildings — with lights out in the evening. Owners and their lenders are holding out for bubble-era prices, rather than realize losses and sell to people who could help the city wean itself off Wall Street.
The lenders, flush with federal cash, think they can wait out reality, too — but they prevent new people from moving in, providing tax dollars that don’t come from finance.
Mayor Bloomberg should put every dollar of Wall Street profit above 2003 levels into infrastructure and tax cuts — and stay tough on the coming round of contract talks with the city’s unions.
And he should remind voters that the city’s bet on Wall Street won’t be any better than shareholders’ bets on Lehman Bros. and Bear Stearns. Washington can’t prop up finance forever.
Nicole Gelinas is a contributing editor to the Manhattan Insti tute’s City Journal.