Monday, January 25, 2010

The Bank Problem in a Single Chart

This chart appeared this morning in the Financial Times. It comes from Deutsche Bank strategist Jim Reid.

I will attach the complete link to the site below, but I think the chart and article discuss an important point. Until the late 1990's, the growth in banking profits largely mirrored the economy. This seems logical.

However, once derivatives and leverage combined to allow the financial sector to make huge profits, finance became an important driver of earnings for the economy (in 2007, for example, almost 40% of the profits of the S&P 500 came from the financial sector). However, all of this came crashing down in 2008, as we are all painfully aware.

But here's the problem: notice the spike in financial profits that occurred last year as a result of government intervention. Once again, the financial sector appears to be making profits that are disproportionate to the overall economy. This is probably one of the main issues that President Obama (spurred by Paul Volcker) is trying to address.

However, as we saw in the past decade, sometimes regulations can lead to unexpected consequences, and not all of them are favorable.

Here's the link: