What a deal. As the banks of Wall Street begin to post higher profits from the 1st quarter, we could possibly see a 2nd quarter of sustained profits, with short term trading and gains on banking stocks. Still the tax payer of American got shafted big time. Can Wall street earnings bring it out of recession (Wall Street) for the rest of 2009? Probably not, yes it could pop out of recession then pop back again at some point in 2009. We have to remember billions of tax funds has been been thrown at the banks, as they bankers wield enormous influence over Washington and of course Obama's crack pot finacial adviser's. From a certified tax dodger Tim Geithner, to a possible fraudster who is the car Tsar, in charge of restructuring the terminally sick US car industry.
I can't help thinking how all this reminds me of how corruptible government can be, especially when a governing system and a collapsing economy leads to desperation. As monetary policy starts to become increasingly a short term gain (for the people in charge), sans the economy and the people. Popular culture reference that comes to mind is the God Father 2, when Michael tries to make the Corleone family legit and realizes that the the legit business men and their congress representatives are 'worst' than the mafia, and 'hypocrites" too.
But that is how it is, a government that has misused tax payer money to bail out the speculators, crooks and liars of Wall Street. Who are now able to hide toxic assets on their balance sheets as they were able to change the market to market accountancy rules (on assets). So does all this mean the they can return to business and start the beginning of a another credit expanded bubble? As Obama says, get 'credit flowing again to the consumer'? No, of course not. The US is in trouble, consumer confidence is almost non existent, they are now in complete survival mode. Betrayed and beaten by an administration policy that should be concerned about the welfare of people that did not speculate nor gamble on the markets. The US government, Federal Reserve and the US treasury should have allowed a slew of banks to disappear, at least a few more investment banks. Allowing Lehman Brothers to collapse was not enough. Meaning that as discussed in World Crisis scenarios for the 21st century - Worldwide economic depression - (update 18), to return confidence to the populous, as far as wanting the people to contribute to the market place again. There should have been justice and punishment, a good example of reckless self interested behavior with lack of justice and punishment were the AIG executives, Fannie Mae and Freddie Mac executives and investment banks of Wall Street; there should have been no propping up of these institutions, they should have been dismantled and shamed. With a better, more competent business taking over the assets. The banking systemic risk aspect is negligible in the sense, the world was at the time (and still is) in a systemic based (interlinked) recession. Due to consumption collapsing all at the same time. A few bank failures would have edged us towards a bottom quicker (as far as stocks go). The theory now (Central Banks) is to pump money into banks and lower interest rates, hence the reason that bank failures didn't exist. Of course in high risk environments and with 'free money' - the banks may take risks again and re-lend. It's like drug addicted dealers selling. This may cause another mini mortgage bubble in a distressed market which will end in tears.
So despite the banks trying to reassure the market that they will be profitable, they will still suffer further writedowns into 2009, as America still contracts and the consumer still doesn't spend (in earnest) the recession will be long and hard. Which means the banks will be knocking on congresses door again.
This could point to the Obama's administration to finally let some banks/bad businesses go; which would be the best thing, as discussed in US treasuries and the China Syndrome I speculated that this could happen, then later believed that they were incapable of doing that, but they need the consumer to feel confidant. The consumer wants to see a bad business fail or at least feel that some sought of market justice has been brought upon a reckless and greedy business. In makes absolutely no sense having the consumer take the liabilities and the risk from the banks, while the bank then goes in to profit.
Still with the nature of the markets, rival analysts will tear the bank balances sheets to pieces. So I still believe there will more volatility with banking stocks in the months into 2009.
On the broader economic scale, to have a handful of banks claim profit in the q1 of 2009 and slight bounce in consumer confidence surveys (even through consumers were concerned about inflation) is hardly enough to see a sustained recovery.
Any current bounces in the global economy is on the back of the last huge stimulus packages. I personally believe if inflation is still lurking and the government keeps spending we will still see a further pull back from the consumer, especially when unemployment hasn't peaked.
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