Recovery? What Recovery? Whose Recovery?

            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.

           This somber anniversary has sparked a modest flurry of retrospection in the media.  But the dominant tone (Michael Moore’s new movie aside, of course) has not been criticism or recrimination.  To the contrary, much of the commentary has been downright cheery, verging on smug and self-satisfied.  We stared into the valley of financial death, the pundits crow.  And we survived.  So let the good times roll once again.

            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.  The TSX’s ascent had created some half-trillion dollars of “value” out of thin air.  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.  (Wait a minute, governments are allowed to print money like that.  But they choose to raise funds the old-fashioned way.)

            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.  Gee, that sure beats working for a living.  Compare that to flipping burgers at McDonald’s:  in that case, your income has not likely grown a penny in the last six months.  But you still must declare every penny on your tax return.

            Financial stocks in Toronto have almost doubled since March, rising twice as fast as the market as a whole.  And no wonder: Canadian bank profits are swelling the coffers once again.  Combined after-tax profits for the five largest banks reached almost $5 billion in the third quarter of the current fiscal year.  Over the last four quarters, big-bank profits are almost $14 billion.  The industry didn’t have a single unprofitable quarter, right through the meltdown (of course, $200 billion in federal financial assistance didn’t hurt).

            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).  It’s not yet back to the inflated peaks of late 2007, when the bear market began, but it’s headed in that direction.  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:]

            Most infuriating, it’s not just the profits and market capitalization of the banks that are booming.  So are payouts to financial executives.  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.  The Royal Bank alone has booked $2.7 billion in bonus payments.

            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.  But we know where the real money ends up. 

            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.

            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.  Since May, the article gushed, “sales of house listed for $5 million and up suddenly took off.”

            So perhaps I am too grudging when I suggest that this so-called “recovery” is benefiting only bankers and brokers.  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.  I guess that’s called “gain-sharing.”

            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.  And many people who should know better, end up equating a return of financial exuberance with evidence of true turnaround.  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.  That may be true for him.  But it’s certainly not true of 90% of Canadians.  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.

            Meanwhile, the real economy where people actually work and produce is still in the dumps.  No recovery there yet.  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.  But that’s very different from actual recovery.  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!).  Per capita GDP is lower than in spring 2004 (when Paul Martin won his minority government).  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.

            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).  Those are all signs on continuing decline, not recovery.

            Recovery?  What recovery?  Perhaps more to the point: Whose recovery?


  • corporate welfare always sucks and the common folk always pay for their mistakes and their largeness. And neither the Blue conservatives or the Red conservatives will change this status quo.
    Thanks Jim – sure does not make me happy.
    So how do we change this? What would be a good start.
    How do we make our economy work for the most rather than the few??? That’s what we need to know and to implement.

  • i’m going to jot this down here as it’s harvest time and v. busy,
    but the other day i had a good talk with another farmer in our area. both he and his wife had recently lost their off-farm unionized jobs. (this is generally the rule out here for farm families- other jobs are needed to maintain farms, because of casino-controlled input and commodity prices etc.)

    anyway, one of the products he used to make in his off-farm job is now being imported from China.

    he and his wife are both looking for whatever jobs they can get at present, and there are none to be found out here (they’re both getting senior).

    he said “that’s ‘global’ for you” and shook his head.

    when i mentioned that it was so called ‘free’ trade, he said, ‘well we can thank Mulroney for that can’t we’..

    the conversation went on, but that’s all i’ve got time to write for now.

  • the point being that the loss of good jobs is impacting not just those sectors where there were layoffs, or related industries, it’s affecting sectors where there are perhaps not well-documented, but nevertheless important connections.

    unless there are real changes in the ‘fundamentals’ of the real economy, changes to rules for investment, trade, and public investment in public services (not further cuts!) and clean energy, to provide good jobs and foundational supports, there is simply no way there can be any ‘real’ economy rebound. the stock market will just blip again as the lives of most people and the environment deteriorate.

  • It is an amazing time we are living through. Actually how about astounding.

    The dynamics of the calamity are quick to unfold and the actions are swift- but so one sided in nature in favour of those with a majority of the assets.

    So much uneveness- I truly feel that despite all the talk of recovery, a lot of uneasiness is still swirling around in the minds of the asset holders. Sure some of the losses have reflated- but with the uneveness in outcomes, i.e. capital assets in the paper economy versus unemplyment in the real economy, I do wonder how far talking it up can actually keep the bubble inflating for the former.

    I guess for me, the equation is, how far can the imbalance between the recovery in the financial sector versus the gathering storms of unemployment be maintained. How far can the two be set against each other before the scales are overturned.

    It is quite fascinating and we enter new space here every day with a divergence in outcomes.


  • I think that this analysis is highly dependent on the precise time period considered. Since the stock-market lows of March 2009, the TSX is up 50% while real GDP is down 1% and total employment is flat. So, the recovery has been purely financial.

    However, since the stock-market peak of June 2008, the TSX is down 25% while real GDP is down 3% and total employment is down 2%. So, finance has been hit far harder than the real economy.

    The crisis was a collapse of asset prices, which hurts the rich more than working people. Of course, since the rich were so much better-off to begin with, they may not deserve much sympathy.

  • Erin, are you including p/t jobs at Timmy’s or delivering papers in the same category as f/t jobs with benefits?

  • Yes, those figures were just total employment. Full-time employment is down 1% from March 2009 and 3% from June 2008. Full-time employment has declined more than total employment and as much as GDP, but still far less than share prices.

  • Jim wrote:

    So perhaps I am too grudging when I suggest that this so-called “recovery” is benefiting only bankers and brokers. 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. I guess that’s called “gain-sharing.”

    Gain-sharing? is that the new name for trickle-down.

    In other news rich people surveyed said “if poor people do not make us richer we will make them suffer more.”

  • “the TSX is down 25% while real GDP is down 3% and total employment is down 2%. So, finance has been hit far harder than the real economy.”

    Erin, you’re comparing apples with oranges. The numbers have entirely different Meanings. A TSX drop for rich people doesn’t mean they’ve been hit ‘hard’. It just means they can’t buy that extra island in the Caribbean. Job eliminations, however ‘low’ the percentage, mean poor people are getting hit Very Hard.

  • As I also wrote, “since the rich were so much better-off to begin with, they may not deserve much sympathy.”

  • yes I saw that, but it seemed like a footnote to your main point, “finance has been hit far harder than the real economy”, which I do not agree with at all.

    The numbers 25% vs. one or three % are counting entirely different things and to juxtapose them and come up with the conclusion that ‘finance has been hit harder’ is really misleading. Something I’d expect to hear from Flaherty, not you.

    You can make it up with a few nice posts exposing the ‘hardships’ the rich have had to undergo the past year, like Peter Newmann used to do.

    You could clarify the numbers you’ve provided here with numbers showing the real assets of the average financier compared to the real assets of the average unemployed person. something like that.

  • Your point about apples-and-oranges comparisons is well taken. Simply picking different measures would indeed tell a different story. For example, the number of unemployed Canadians has increased by 43% since June 2008, which is proportionally larger than the 25% decrease in the TSX.

    To some extent, I was just keeping Jim honest, which is one of my minor roles in life (or at least on this blog). My serious point is that we should not get too carried away with the narrative that Bay Street sailed through the crisis unscathed. After all, this crisis was caused by a massive collapse of financial markets.

  • speaking of measures a couple of interesting measures came out today that could mean the “recovery’ as personified by the optimists, is indeed not the recovery they thought it was.

    Retail sales were down, 0.6% On a year over year basis it was surprisingly lower, and in many retail areas that one could consider discretionary spending has been cut way back since last summer.

    Mind you, the survey showed positive the previous two months but barely and we seem flatlined since steep decline or lets call it recessionary adjustment late last year.

    This is quite a good measure for three and probably more reasons: it is quite timely, it is very robust and reliable, and reflects the consumption mood of the consumer.

    Another number out today was the commercial vacancy rate, it was way up, which would indicate a bit of a glut in that market, which is not good.Sorry the site it down other wise I would put up the stats.

  • ok thanks

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