Wall Street’s large banks reported decent earnings, but there were a number of red flags in the reports.
While revenues were good — due to the near-zero cost of capital — many of the traditional banking sectors, like mortgages and credit card revenues, were falling.
For decades, America’s banks have been the economic engine that led us out of recessions. That’s why the Federal Reserve Bank’s interest-rate moves have always been so important to the economy. And in the past they always worked.
The idea is, when interest rates get lowered, banks pass it along to their customers in loans. However, as each of the major banks reported billions in quarterly earnings last week (Jamie Dimon’s JPMorgan, for example, reported more than $6 billion), they are either still unwilling, or not yet “permissioned,” to lend to, or invest in, their customers freely.
So it comes as no coincidence or surprise that the economic data of late have weakened yet again.
The banks, whose cost of raw material — capital — is currently zero, are cashing in. But they are still struggling to adjust to the new rules that oversee most of their operations.
The banks’ profits have come from what’s called the “Fed spread”: the difference between, on the one hand, existing credit-card rates of 12 percent to 20 percent and existing loans of 3 percent to 5 percent, and on the other hand, the Fed funds rate, which is essentially zero. If you charged 15 percent in credit-card interest and those funds cost you nothing, you would make money, too.
Yet even with that plush profit cushion, the major Wall Street banks have announced 21,000 layoffs for the quarter. JPMorgan — off record profits and 12 months after the London Whale trading debacle — letting 17,000 people go between now and the end of 2014, predominantly in mortgage servicing and retail banking — services that cater to the middle class.
This has a major impact on New York families, as well as on the small businesses that rely on them. That’s 17,000 fewer people paying taxes to help pay down the debts of New York and the Treasury. And it’s also 17,000 families that face a new bout of economic difficulties. There’s no stimulus or spending plan that can change that.
Today’s Wall Street banks are essentially morphing into the new Fannie Mae and Freddie Mac, although they don’t much like it. They are in a constrained cooperative with Washington.
They are feeding off the Fed’s fuel, yet unable to act with the entrepreneurial spirit they have for more than 100 years. Without the banks’ capital commitment and investments in businesses, the US middle class is on a road to ruin.
Right now, the banks are merely capital distributors, not capital creators — as well as the Fed’s ATM for the upper class. And that’s not American.