Recovery? What Recovery? Whose Recovery?
Â Â Â Â Â Â Â Â Â Â Â This week marks the one-year anniversary of the collapse of Lehman Brothers: the darkest moment of the global financial crisis, when those in charge genuinely feared for the survival of their system.
Â Â Â Â Â Â Â Â Â Â This somber anniversary has sparked a modest flurry of retrospection in the media.Â But the dominant tone (Michael Moore’s new movie aside, of course) has not been criticism or recrimination.Â To the contrary, much of the commentary has been downright cheery, verging on smug and self-satisfied.Â We stared into the valley of financial death, the pundits crow.Â And we survived.Â So let the good times roll once again.
Â Â Â Â Â Â Â Â Â Â Â At time of writing, Canada’s main market, the TSX, is up by more than 50 percent in six months – the rally that began on March 10 after the CEO of Citibank announced that his bank would make positive profits once again.Â The TSX’s ascent had created some half-trillion dollars of “value” out of thin air.Â That’s enough to pretty well pay off the federal government’s accumulated debt, if only governments (like the financial industry) were allowed to just magically print money like that.Â (Wait a minute, governments are allowed to print money like that.Â But they choose to raise funds the old-fashioned way.)
Â Â Â Â Â Â Â Â Â Â Â And if you’re one of those lucky market-timers who picked the bottom, that 50 percent profit you’ve made in 6 months is a capital gain, and hence you only declare half of it on your income tax.Â Gee, that sure beats working for a living.Â Compare that to flipping burgers at McDonald’s: Â in that case, your income has not likely grown a penny in the last six months.Â But you still must declare every penny on your tax return.
Â Â Â Â Â Â Â Â Â Â Â Financial stocks in Toronto have almost doubled since March, rising twice as fast as the market as a whole.Â And no wonder: Canadian bank profits are swelling the coffers once again.Â Combined after-tax profits for the five largest banks reached almost $5 billion in the third quarter of the current fiscal year.Â Over the last four quarters, big-bank profits are almost $14 billion.Â The industry didn’t have a single unprofitable quarter, right through the meltdown (of course, $200 billion in federal financial assistance didn’t hurt).
Â Â Â Â Â Â Â Â Â Â Â In America, similarly, the market value of the largest financial companies has quadrupled since the trough of early 2009 (to a combined $1 trillion for the 29 largest banks and brokerages).Â It’s not yet back to the inflated peaks of late 2007, when the bear market began, but it’s headed in that direction.Â Some financial companies actually grew in value through the crisis (including JP Morgan Chase and Wells Fargo).
[Here’s an interesting on-line graphing tool that tracks the market cap of American financial institutions through the up, the down, and the rebound:]
Â Â Â Â Â Â Â Â Â Â Â Most infuriating, it’s not just the profits and market capitalization of the banks that are booming.Â So are payouts to financial executives.Â A clever Andrew Willis reported in the Globe and Mail last Thursday (Sept. 10) that cumulative variable compensation allowances (that’s Bay-Street-speak for “rich executive bonuses”) at the Big Six Canadian banks swelled to $6.4 billion during the first nine months of the current fiscal year.Â The Royal Bank alone has booked $2.7 billion in bonus payments.
Â Â Â Â Â Â Â Â Â Â Â Not all of that ends up in the pockets of the top executives; token amounts are also divided among more menial employees under various bonus pay schemes.Â But we know where the real money ends up.Â
Â Â Â Â Â Â Â Â Â Â Â If Canada as a society can afford to set aside $6.4 billion to pay bonuses to bankers, we can certainly set aside a fraction of that amount to fix the gaping holes in our EI system.
Â Â Â Â Â Â Â Â Â Â Â A breathy report in the Globe and Mail’s real estate section (Sept. 11) even enthused how the rebound in the financial sector was breathing new life into Toronto’s elite real estate market – supposedly because rich Canadian expatriate bankers are returning home to join in the renewed party going on down on bay Street.Â Since May, the article gushed, “sales of house listed for $5 million and up suddenly took off.”
Â Â Â Â Â Â Â Â Â Â Â So perhaps I am too grudging when I suggest that this so-called “recovery” is benefiting only bankers and brokers.Â Things are also looking up, it seems, for those who service the financial elite: their real estate brokers, their BMW salespeople, their gardeners, their maids, and their nannies.Â I guess that’s called “gain-sharing.”
Â Â Â Â Â Â Â Â Â Â Â The financial sector occupies so much cultural and political space in our society, one could be forgiven for concluding that if things are booming on Bay Street, they must be booming everywhere.Â And many people who should know better, end up equating a return of financial exuberance with evidence of true turnaround.Â For example, I spoke this week with the CEO of a major Canadian manufacturing company (not auto) who said that with the stock market rebounding so strongly, people will feel richer, and then they’ll spend more.Â That may be true for him.Â But it’s certainly not true of 90% of Canadians.Â This so-called “wealth effect” doesn’t have any bite for the vast majority of Canadians who have no significant financial wealth in the first place.
Â Â Â Â Â Â Â Â Â Â Â Meanwhile, the real economy where people actually work and produce is still in the dumps.Â No recovery there yet.Â There is certainly evidence that things have leveled out, after the rapid decline in employment and output that occurred in the wake of the Lehman collapse.Â But that’s very different from actual recovery.Â Real GDP is lower than it was in February 2006; private-sector GDP is lower than November 2005 (before Stephen Harper first snuck into office!).Â Per capita GDP is lower than in spring 2004 (when Paul Martin won his minority government).Â By that measure (which many economists, wrongly, interpret as an indicator of living standards), we’ve lost five years of economic progress – and we’re still going backward.
Â Â Â Â Â Â Â Â Â Â Â Employment has not rebounded, the employment rate is falling, the unemployment rate is rising, and there are 1 million officially unemployed Canadians who do not receive regular EI benefits (not counting the unofficially unemployed).Â Those are all signs on continuing decline, not recovery.
Â Â Â Â Â Â Â Â Â Â Â Recovery?Â What recovery?Â Perhaps more to the point: Whose recovery?