A Complete Waste of Time

Business Week economist Michael Mandel posits something a bit unpalatable about corporate profits in the past 10 years:

The question is—how much of corporate profit growth during this decade was driven by the financial sector? The answer is: Almost all of it...The bottom line on 97-2007: Very little or no real wage growth for most Americans, very little real profit growth for the domestic operations of nonfinancial corporations.

Click on the link and look at the graph. Profits from non-financial corporations rose only a nominal 6% over the 10 years starting in 1997. For financial corporations during the same period, however, rose much higher.

I'm certainly not going to complain too loudly about the highly profitable times enjoyed by the financial sector, as I benefited greatly during that time. Which is why I'm choosing my words carefully here. When Republicans took control of Congress in 1994, the Contract With America promised all sorts of bills that were supposed to create jobs. Most of the economic stimulus involved more tax cuts for businesses and less governmental regulation. If you look at the topo part of the graph, the line for non-financial corporations rises sharply in 2001, shortly after the Bush tax cuts took effect. The absence of federal regulation, a movement toward more pure capitalism without some protection against abuse, the worship of "free markets" and supply-side economics -- we all know that this doesn't work in practice.

The statistics don't lie. During the time shortly after the GOP dominated Congress and through much of the Bush Administration, the lack of federal regulation and massive tax cuts for the wealthiest individuals and corporations led to abuses that were unprecedented. The rich raped the financial landscape and left behind individuals with massive debt, all addicted to the idea that they could leverage their way into wealth, virtually without risk. In the last 18 months, millions of jobs have been lost as the insanity of what was done without the benefit of proper government oversight was discovered.

You'll notice that I haven't blamed the housing boom. Well, I'm not going to. Housing prices rise and fall in cycles. But with Wall Street buying mortgages written that had no sound risk analysis, and with greedy institutions and individuals all wanting a piece of the action and creating securities and insurance policies that were more complicated than almost anyone could comprehend, certainly inflated the up cycle and exacerbated the down cycle.

The days of easy mortgages are pretty much over. There are no investors for mortgages that Fannie Mae and Freddie Mac will not purchase, so banks have to hold them in their portfolios. You can bet that those mortgages are both more expensive and substantially conservative with their risk management guidelines. As we plow through the inventory of foreclosed homes, prices will come back. There will be temptation to relax guidelines and ease up on federal regulations, but I truly hope that doesn't happen.