Monday, April 26, 2010

Does Krugman Make A Sales Pitch Of US Banking System?

Equities of US Financials are among the TOP 3 best performing sectors so far this year, but Nobelist Paul Krugman had a reason to attack this sector last Friday. Although I suspect the political drive here, Paul Krugman wrote:

That, I’d argue, is what the financial industry has been doing for a long time: borrowing by issuing supposedly safe assets, investing the proceeds in assets that don’t really yield more, but seem to.

...What has happened instead was that the very growth of the financial sector led to an upward trend in asset prices that masked the real risks — the way the housing bubble masked the true risks of subprime lending is a key example, but not unique. Sooner or later, however, the bubble would run out of room to expand, and the whole thing would collapse.

If this sounds Ponzi-ish, it should. Bob Shiller pointed out way back in his book “Irrational Exuberance” that a bubble is, in effect, a natural Ponzi scheme, which doesn’t actually require a deliberate act of fraud yet has the same effect.

Err, the first quoted paragraph rather smells fraud-ish, but you know - Gods work ? :) Profits are that make people, also on the Hill, to dance.

Here is another version of profit story, courtesy of Societe Generale. As classic economic book teaches about recessions, the development of oligopoly profit margins catches the eye. Another text-book case? Click on chart to enlarge.

Financial profit margins, that at the end of the day are zero-sum game for economy as a whole, are rising, and so are the corporate profits. So, a bigger share of national income is allocated to bankers, corporate sector and shareholders. It seems that labor compensation as a share of national income in US is about to be decreasing? Err, forget that household de-leveraging? They do not need to save in Ponzi scheme ... as Russell Napier was writing:
When it comes to economics, youth and inexperience, key drivers of consumption, are often more rewarding than the age and guile that brings conservatism and savings.
Can the U.S. grow so fast to compensate the pace of this decrease in labor share? Or, will it be a permanent state of bailouts?

Well, forget it! How one could ever be saving in a financial Ponzi scheme? :)

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