Trouble for Wall Street Is Trouble for Main Street

By Daniel Indiviglio

Things are okay on Wall Street. But only okay. Since this summer, the recovery has slowed, and banks have noticed. The monster quarters they had in late 2009 and early 2010 aren't expected to repeat later this year or in early 2011. While this might encourage some Main Street dwelling bank bashers to cheer with Wall Street on the ropes, they shouldn't. The circumstances causing lower Wall Street profits are bad for Main Street as well.

Some of the problems on Wall Street are explained today by Nelson D. Schwartz in the New York Times who writes:

Even after taxpayer bailouts restored bankers' profits and pay, the great Wall Street money machine is decelerating. Big financial institutions, including commercial banks, are still making a lot of money. But given unease in the financial markets and the economy, brokerages and investment banks are not making nearly as much as their executives, employees and investors had hoped.

There are several reasons for their profits declining. First, the stock market isn't soaring like it had through April. Second, mortgage-related losses haven't leveled off as quickly as banks had hoped. Third, there's less economic activity, which is hurting investment banking advisory businesses. Finally, banks are still trying to adjust to new financial regulation, which will likely lead to some layoffs and lower profits.

Anyone who shared in the populist outrage of big banker bonuses in 2009 might be pleased that profits are down for Wall Street. But this attitude misses the big picture. Lower profits for banks could only be positive if that money shows up elsewhere in the economy. It won't.

All of those above reasons above for the financial industry slow down were ultimately due to or will result in weaker business activity -- they will not result in a change where some other sector is better off at Wall Street's expense. If investment banks had made higher profits, their employees would have either spent their bigger bonuses on goods and services, invested more money, or saved it. All three options are helpful to a weak recovery. But that wealth simply won't be created -- it isn't being transferred somewhere else to be more effectively utilized in the economy.

As financial firms struggle, the broader recovery will too. If Wall Street renews its layoffs, then this will put pressure on unemployment, as it struggles to decline. Banks may get even stingier with their money, and allow credit to contract further. Finally, New York City and state will certainly feel some pain if Wall Street has a weak second half. They are highly dependent on the financial sector. New York businesses and tax receipts will struggle without high Wall Street profits.

This isn't to say that bank profits should return to their pre-crisis astronomical levels. But the reasons for Wall Street making less money don't help anyone. The financial sector is one of the few industries in which the U.S. has led the world over the past decade. If it has trouble, then the entire nation will be worse off.

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