Monday, November 09, 2009
Snapshot of the economy:Bloomberg
Nov. 9 -- Goldman Sachs Group Inc., Morgan Stanley and JPMorgan Chase & Co.’s investment bank, survivors of the worst financial crisis since the Great Depression, are set to pay record bonuses this year.
The firms -- the three biggest banks to exit the Troubled Asset Relief Program -- will hand out $29.7 billion in bonuses, according to analysts’ estimates. That’s up 60 percent from last year and more than the previous high of $26.8 billion in 2007. The money, split among 119,000 employees, equals $250,400 each, almost five times the $50,303 median household income in the U.S. last year, data compiled by Bloomberg show.
What this illustrates is the growth of the financial sector in the United States over the last 30 years. It's become it's own economic island, divorced from manufacturing and the service sector, both of which are where real economic prosperity are generated.
As Kevin Drum and others have asked, what are these financial institutions doing that's so valuable? To a certain extent, they are raising money for businesses and providing hedge insurance, but the overwhelming amount of activity appears to be in outright speculating. That bet-the-trend works well when you have an accommodating Fed (the Greenspan years) and when you screw up, your back is covered as well (Bernanke shoveling money via AIG). So it's win-win for a bloated sector of the economy.
It's become it's own economic island, divorced from manufacturing and the service sector, both of which are where real economic prosperity are generated.
Just to run this point into the ground, as it were, I'm going to propose what I will call the extractive sector of the economy, for want of a better word. All wealth ultimately comes out of the ground (and associated bodies of water). It is harvested, raised, farmed, fished, hunted, pumped out, dug up and cut down. Food is the basis of all wealth, without it everything else ain't worth the powder it'd take to blow it to hell. Next in line is what I'll call the processing sector: manufacturing, refining, milling, packing, construction, transportation etc. This is the conversion of raw wealth to a usable form and making it accessible to consumers. And so on up the line to the financial sector which, at best, serves the the function of making large amounts of capital cost-effectively available to the basic producers who generated it in the first place. The financial sector is not where wealth comes from, it's where it goes. And a great deal of it never comes back.