Prosperity and long-term trends

You’ve probably seen this Obama “Road to Recovery” jobs plot for 2008 to 2011:

And there’s a conservative version of the story on Carl Rove’s website as well:

Both are giving you a short term perspective of a long term problem. For the record, Carl Rove’s version is more misleading because of several plotting tricks:

  • Arbitrary timeframe (if February 2009 is the starting point, then why is Obama judged to be 651,020 jobs in the hole on inauguration day? What’s the “zero time point” here?
  • Arbitrary endpoint (Rove was posting this report monthly and suddenly stopped in December 2010. Why is that? Coincidentally, the next month starts the flip from negative to positive on Obama’s chart.

Side by side: Carl Rove chose the perfect time to start and stop reporting

The Missing Perspective

Looking back ten years helps me to see that job growth in 2011 wasn’t that different from most of the 2000s. But it doesn’t explain why unemployment remains high. I needed more context.

If the 2008-2010 recession was caused by banks, take a look at the banking industry. This chart took me a while to compile from several small charts because nobody looks at long term trends in banks.

From 2004 to 2010, the banking industry made a healthy profit. Even when the bottom was falling out of the housing market in 2008, requiring a record infusion of cash from the bank’s holding companies, shown here,

The banking industry did not collapse like it did in the past.

Going into the distant past, bank failures were much more common:

Why aren’t banks collapsing like they should?

Banking is not real capitalism. For contrast, airlines are a typical industry that follows a business (and regulation) cycle. Shown below are net profits for the airline industry from 1989 to 2009:

US Airline profits, 1989 to 2009

(I call the version that banks enjoy “crapitalism” – because the net effect of “stability” is less prosperity, more corruption, and ineffective governance.)

The long-term view of banks is totally different from the airline industry. Below you can see that profits and growth came to banks every year from 1904 to 2008 (1997-2004 is missing data).  I had to squeeze and scale lots of bank reports to show this, so sorry for the tiny text.

Going as far back as 1904, banks as an industry have made money every year even through depressions and booms. It would take the entire economy to collapse* in order to banks to feel it. (* so in the 4th quarter of 2008 looks like the economy collapsed, only the government flushed trillions of dollars into the chasm to seal it up.)

In the past (1870-1930), greed still managed to make a lot of banks fail, even though loans are a pretty safe way to make profits.

There’s another reason why banks do well during hard times. Governments borrow money and give it to banks, and this accounts for more and more of their assets.

Here you can see that over the last decade Japanese banks have loaned to the US government (by buying government bonds), and this is now most of their wealth:

And also over the long term, “banks” have become investment machines and less of what they do involves loaning money:

This is what bankers mean when they talk about innovation and “financial instruments”: Little of what they do with money is about loans, which is also why few banks needed to collapse simply because the economy did in 2008. This resilience is also evidence that the government is doing everything possible to prevent banks from experiencing what every other industry knows as bona fide “capitalism.”

(Note: The only other industries that have consistent profits and growth every year are US health care and the oil industry.)

Loan losses are huge, but banks can now make record profits simply by moving money around. In 2010, the largest US banks earned a profit every day of every quarter by taking US bailout money and returning it to the same government in the form of government bonds (US debt).

All of this sums up into a simple picture that I posted last week.

Real wealth versus fake wealth created by the global banking and finance system:

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