In one of his lesser-known songs, “Easy Money,” legendary singer-songwriter Billy Joel writes:
I want the easy, easy money
I could get lucky, things could go right
I want the easy, easy money
Maybe just this time, maybe tonight.
Things aren’t so easy these days for the too big to fail banks whose financial shenanigans are coming home to roost.
Profits at mega Wall Street banks took a nosedive in the 2nd quarter, as "easy money" policies that made the pandemic era a boom time in lower Manhattan come to a close.
The latest earnings reports show that Goldman Sachs and Bank of America earned smaller profits than a year earlier. Ditto for Wells Fargo, Citigroup, JPMorgan Chase and Morgan Stanley.
Free money on Wall Street — a side effect of the “emergency” monetary policies the Fed implemented to keep the pandemic from imploding the economy — has been winding down over the last few months.
The Fed started cutting interest rates in March 2020 – slashing them to virtually 0% and began printing trillions of dollars and pumping them into financial markets, if not the economy as a whole.
And as Matt Phillips points out, that turbocharged Wall Street – driving public stock offerings and corporate bond sales, advising and financing big mergers and acquisitions, and operating hyperactive trading desks.
Bank stocks themselves surged, too. A year after the stock market hit bottom in March 2020, Morgan Stanley was up 200%, Goldman Sachs was up 150%, while Bank of America and Citigroup had doubled.
The S&P 500 grew by a measly 75% over that same time.
Fast forward to 2022: interest rates have begun to take off, rapidly changing the conditions in financial markets and slowing down business in the New Normal.
High rates have been crushing stock prices as of late and pushing the S&P 500 into bear territory, and now, companies are getting antsy about what new business to write in a down economy.
The business of managing new corporate bond sales is also sagging as interest rates rise – with companies not wanting to borrow at the new, outrageously high rates (2-3%!).
And, as Phillips notes, higher borrowing costs – which the Fed is using to try to ease inflation – also increase the risk of recession and the losses on loans that normally occur during downturns.
So, banks are socking away billions in reserves just in case things get ugly, which hurts their earnings.
But it's not all bad on Wall Street. In fact, volatility can be good for bank trading desks that make the right calls. Trading was a bright spot for Goldman and Citi this last quarter.
Higher interest rates can also boost the money that banks make by charging interest – Bank of America, for one, did just that.
But overall, higher interest rates in the months ahead mean tighter margins for big banks – with stagnant dividend payments, less share buybacks and more circumspect credit for the rest of us.
Could It Get Worse?
By Dave Allen for Discount Gold & Silver
In one of his lesser-known songs, “Easy Money,” legendary singer-songwriter Billy Joel writes:
I want the easy, easy money
I could get lucky, things could go right
I want the easy, easy money
Maybe just this time, maybe tonight.
Things aren’t so easy these days for the too big to fail banks whose financial shenanigans are coming home to roost.
Profits at mega Wall Street banks took a nosedive in the 2nd quarter, as "easy money" policies that made the pandemic era a boom time in lower Manhattan come to a close.
The latest earnings reports show that Goldman Sachs and Bank of America earned smaller profits than a year earlier. Ditto for Wells Fargo, Citigroup, JPMorgan Chase and Morgan Stanley.
Free money on Wall Street — a side effect of the “emergency” monetary policies the Fed implemented to keep the pandemic from imploding the economy — has been winding down over the last few months.
The Fed started cutting interest rates in March 2020 – slashing them to virtually 0% and began printing trillions of dollars and pumping them into financial markets, if not the economy as a whole.
And as Matt Phillips points out, that turbocharged Wall Street – driving public stock offerings and corporate bond sales, advising and financing big mergers and acquisitions, and operating hyperactive trading desks.
Bank stocks themselves surged, too. A year after the stock market hit bottom in March 2020, Morgan Stanley was up 200%, Goldman Sachs was up 150%, while Bank of America and Citigroup had doubled.
The S&P 500 grew by a measly 75% over that same time.
Fast forward to 2022: interest rates have begun to take off, rapidly changing the conditions in financial markets and slowing down business in the New Normal.
High rates have been crushing stock prices as of late and pushing the S&P 500 into bear territory, and now, companies are getting antsy about what new business to write in a down economy.
The business of managing new corporate bond sales is also sagging as interest rates rise – with companies not wanting to borrow at the new, outrageously high rates (2-3%!).
And, as Phillips notes, higher borrowing costs – which the Fed is using to try to ease inflation – also increase the risk of recession and the losses on loans that normally occur during downturns.
So, banks are socking away billions in reserves just in case things get ugly, which hurts their earnings.
But it's not all bad on Wall Street. In fact, volatility can be good for bank trading desks that make the right calls. Trading was a bright spot for Goldman and Citi this last quarter.
Higher interest rates can also boost the money that banks make by charging interest – Bank of America, for one, did just that.
But overall, higher interest rates in the months ahead mean tighter margins for big banks – with stagnant dividend payments, less share buybacks and more circumspect credit for the rest of us.
Could It Get Worse?
Yes. In a word, think Recession.
A recession would be worse than the inflation the U.S. is seeing now, which is actually showing signs of slowing down, some economists are saying.
The Federal Reserve has been hiking interest rates to tamp down inflation and is expected to pile it on next week.
But that runs the risk of triggering a downturn. And at this point, as Emily warns, that "cure" might be worse than the illness Dr. Powell is treating.
Yet, Josh Bivens of the Economic Policy Institute says, "The data is saying we have time to be flexible."
The high inflation the government reported for June freaked a lot of people out, but energy prices mostly drove the surge. This month, gas prices have fallen at their fastest rate since the pandemic.
Other commodity prices are down from their recent pandemic highs, too – for example, lumber.
Meanwhile, inflation expectations are receding. Economist Dean Baker at the center for economic and Policy Research believes, "There are a lot of reasons for believing that inflation has peaked."
With inflation, he points out, there are actually winners and losers. "One person's cost is another person's income," Bivens notes, calling out record oil company profits.
Rents and home prices go up, landlords and sellers make out; tenants and buyers, not so much.
Bivens – who usually sides with labor – doesn't like how this redistribes wealth. But a recession "would have worse distributional consequences."
In fact, in a recession, everyone loses – not just, say, those who lose their job.
Even if you’re lucky enough to not be laid off, pay raises go “poof,” the career ladder breaks down. In short, the economy is worse off.
And young adults just getting started in their career paths have fewer job options, too.
That’s particularly notable, given how the recent economic rebound has helped those toward the bottom of the totem pole.
Peck says lower-paying jobs that have improved over the past year and a half “would worsen significantly, as employers took back the upper hand.”
And, Biven added, typically in a recession, the first to lose jobs are lower-income or less-educated folks, or those with criminal backgrounds, Baker emphasized.
As Peck notes, higher prices also hurt those people, “but unemployment isn't going to make that better.”
On the other hand, recessions can be short (note 2020, so they say), while longer-term, structural inflation nibbles away at purchasing power ad infinitem.
So, of course, we’re watching the Fed to see if they go for a 0.75 percentage point increase next week – or more – and how the markets react (it won’t be good for Wall Street…or Main Street).