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Did Washington Save the Economy? Part 5

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Bottom line: There is no "jobful" recovery in sight.

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Editor's Note: This is Part 5 in a 5-part series. Click here to read Part 1. Click here to read Part 2. Click here to read Part 3. Click here to read Part 4.


Trial by FIRE

The next big private business service category is Finance, Insurance, and Real Estate (abbreviated as FIRE), which posted 7.6 million jobs in March -- nearly the identical number reported a decade ago in January 2000. This flatline outcome seems incongruous but is actually consistent with the essential characteristic of the decade's great financial bubble. The latter materialized almost entirely in the form of rapidly mushrooming bank balance sheets. During the final stages of the bubble, for example, Citigroup's (C) employee count barely grew but its footings exploded from $1.5 trillion to $2.2 trillion, or by nearly 50% in only 24 months. In other words, the decade's easy money-fueled growth in financial institutions was accomplished essentially via book entries in the cybersphere, not expansion of actual operating enterprises, bricks and mortar, or payrolls

Consequently, the 550,000 job growth in the FIRE sector during the seven-year Boom was modest, amounting to a gain of just 1% per year. Even then, less than one-fourth (130,000) of this gain was attributable to commercial bank and thrift payrolls. Much of the balance of FIRE job growth, not surprisingly, was accounted for by on-the-ground boots of the housing boom in mortgage banking (90,000) and real estate brokerage (180,000).

Moreover, when the financial bust came in 2008 and 2009, the banks and thrifts took on the aspect of having been hit by a financial neutron bomb; that is, they wrote down or hid trillions in bad assets, but their buildings full of employees were largely left standing. In fact, the payroll of 1.75 million that they reported for March was only 75,000, or 4% smaller than it had been at the December 2007 cyclical peak.

Payrolls related to the housing complex, by contrast, took a bigger hit. The job decline at mortgage banks and other non-depositories was 144,000, or 15%. Likewise, real estate brokerage, rental, and leasing firms posted a March payroll of 1.95 million jobs -- a figure 200,000, or 10% lower than the December 2007 level.

As to the balance of FIRE, which consists of insurance, securities brokerage, trusts, and asset management services, the picture is one of a slow bleed. The March payroll for these segments was 3.064 million -- a figure that has gone nowhere for a decade, shrunk by about 7,000 per month during the two-year Slump, and has continued to decline at a 13,000 per month pace during the first-quarter Bounce.

Given these trends, there is no reason to expect anything jobful out of FIRE for at least three reasons. First, America is still massively over-banked, with thousands of surplus banks and tens-of-thousands of redundant branches. The deadweight cost of the related heat, lights, rents, and payrolls is still being absorbed by bloated net interest margins resulting from the Fed's absurd policy of punishing depositors while propping up (through the end of March) the price of bank assets such as government and agency bonds.

But at the end of the day, the "no brainer" spread currently being gifted to the banks is really a dead-end monetary policy. Because the global currency market vigilantes won't tolerate endless money printing by the Fed, it will eventually have to permit money market interest rates to normalize, and the yield curve to flatten.
No positions in stocks mentioned.

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