Trading revenue has fallen substantially since the Great Recession more than five years ago. This is good news for the future of our economy.
The decline in the real economy coincided with the extraordinary growth in the financial economy over the past three decades. Accommodative monetary policy permitted interest rates to plummet too low for too long, thereby generating strong speculative demand for bonds and equities for those seeking unearned yields on their investment. This demand was met by a massive supply of undercapitalized, exotic derivative products that were traded extensively without adequate capital reserves to sustain possible future losses.
This short-term, arbitrage-related financial activity crowded out long-term investments in land, labor and capital that would sustain potent economic activity. Lower levels of real investment resulted in weak employment and income gains for the masses, as evidenced by the 60 percent decline in money turnover since 1980, according to the Federal Reserve.
Historically, trading revenue has represented a large percentage of overall revenue at commercial and investment banks. However, this trend has reversed considerably for the banks since 2009.
Due to new technology and regulations, demand for trading activity has declined since the financial crisis began more than five years ago. The number of traders involved in fixed income, commodities and currencies (FICC) fell more than 20 percent during this time — from 25,257 to 19,554 — according to Coalition, a London-based business intelligence provider. Commodity trading revenue fell 50 percent from 2008 through 2012.
At Goldman Sachs, total revenue fell nearly 25 percent and trading revenue as a percentage of all revenue dropped more than 40 percent during this period.
Relative to the third quarter of 2012, FICC income for the third quarter of 2013 fell by 44 percent at Goldman; 43 percent at Morgan Stanley, excluding adjustments to debt prices; 26 percent at Citigroup; and 8 percent at JPMorgan Chase. Goldman is expected to post an additional 21 percent decline in FICC in the fourth quarter relative to the same quarter in the previous year, according to Citigroup analyst Keith Horowitz.
Making matters worse, much of the trading is based on unequal access to information. Many high-frequency trading firms pay sources to receive information ahead of the market and illegal insider trading by Wall Street firms remains prevalent. This ecosystem produces a severely skewed landscape in favor of the powerful and wealthy, increasing income and wealth disparities that seriously undermine future economic and financial stability.
The current economic construct is unfair, unproductive and unsound. Without significant changes, it will continue to fail miserably.
Incentives to invest in the real economy include lowering corporate tax rates
below personal rates, raising capital gains rates
and applying the Social Security payroll tax
to more income at lower rates.
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