The Safest Street in America

| Mon Jul. 12, 2010 12:34 PM EDT

As the economy (hopefully) begins to pick up, one of the things that will make recovery difficult is the problem of sectoral shifts. That is, the industries that lost jobs in the recession aren't necessarily the same ones that will gain jobs in the recovery. So if you're a guy who's installed drywall for the past 20 years, you're in dire straits even if the economy starts going gangbusters. There are millions of construction workers who are going to have to find a brand new line of work over the next few years, and that change won't be an easy one.

But guess what? There's one industry where, although a massive sectoral shift would be a blessing, it's not happening: high finance. Here's the New York Times today:

While much of the country remains fixated on the bleak employment picture, hiring is beginning to pick up in the place that led the economy into recession — Wall Street.

Isn't that sweet? But Annie Lowrey says it's even worse than that:

Granted, Rae Rosen believes that Wall Street is hiring in anticipation of better times. But the article, and the data, show that times are already pretty darn good. The Wall Street firms that made it out of the credit crunch and the financial collapse alive are doing just fine, in fact. They have less competition from companies like Lehman Brothers and Bear Sterns. That means more profits.

They also are benefiting handsomely from low interest rates. It is Banking 101: Wall Street firms borrow billions from the government for close to nothing, lend it out and make money on the margin. That means more profits.

Companies like Goldman Sachs are more profitable now than they were in the boom years. That, really, is why they are hiring — not because they are betting on a strong economic recovery. They are making money hand-over-fist despite the fact that the rest of the economy is ailing terribly, and only starting to turn around.

The financialization of the American economy has been a disaster. Forget all that stuff about the hollowing out of our manufacturing base or increased global competition or waves of immigrants taking away our jobs. Those are all legitimate issues of one stripe or another, but the far bigger issue is that a gigantic chunk of our productive capacity — Wall Street — is deployed almost solely to make money for one sector of our economy: Wall Street. Until that changes, until the financial industry is focused primarily on providing capital and services to other people, we're always going to suffer from either (a) underperformance in the real economy or (b) an endless boom and bust cycle. Take your pick.

There's one key metric that will tell us whether financial reform is working: the size and profitability of the FIRE sector. (That's Finance, Insurance, and Real Estate.) If it shrinks considerably, it means financial reform, despite all the watering down, has basically done its job. But if the FIRE sector remains enormous, it hasn't. We'll know in a few years.

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