Banks 1, America 0

Last Friday's job report showed that most of the US is experiencing enormous economic pain, even if America's economy is now in a recovery. Overall unemployment rose to 9.8%, with the unemployment rate for men hitting a new post-depression high. The economy shed another 260,000 jobs in September and the previous figure for jobs lost in the recession was revised up by more than 800,000. The average workweek continues to shorten. With real wages falling, this ensures that most workers will be taking home shrinking wages.

For the vast majority of people in the country, who derive the vast majority of their income from working, the economy looks really awful. But the economy is not looking bad for everyone.

As we are constantly reminded, the financial crisis is behind us and the banks are back in their feet. In fact, they are more than just back on their feet. In many ways they are doing better than ever. The most recent data from the commerce department shows that the financial industry profits now account for more than 31.5% of all corporate profits. This is a higher share than at any point during the housing bubble years.

Of course, it is not that hard to make profits when you get to borrow money from the Fed at almost no interest and then lend it back to the government at 3.5% interest. Suppose the state of California was given the privilege of not only borrowing $1 trillion from the Fed at near zero interest but also using the money to buy Treasury bonds paying 3.5% interest. The $35bn in annual interest rate subsidies would take care of California's huge budget deficit pretty quickly.

But hey, California is just a big state. It's not a Wall Street bank. Congress is not going to tolerate special treatment for state governments.

The "save the banks" crew continues to peddle a seriously misleading story, mostly without challenge. They tell us that we had no choice. If we didn't give the banks trillions of dollars in their hour of desperate need, then the situation would be even worse.

There is no doubt that a complete collapse of the financial system would have complicated the recovery. However, handing the banks trillions, no questions asked, was not the only alternative.

Last year we faced a situation in which nearly every major bank faced bankruptcy: they could not pay their debts without the help of the government. Rather than just make below market loans, with few or no conditions, we could have made loans conditional on changing the way the banks did business. This would mean prohibiting them from dealing in complex derivative instruments, limiting leverage and seriously cutting executive compensation. (How does a $2m absolute cap - counting bonuses, stock options and other perks - sound?)

We could have done this because the US government held all the cards. If they didn't get money from us they would have been out of business. We could have told them to run around Wall Street naked, to walk on hot coals, to wear stupid looking hats, the choice was shutting down their banks and looking for new jobs.

Instead, we just handed them the cash, no questions asked. Now the banks are bigger and badder than ever and paying out big bonuses, just like before. As things stand, they will be an even bigger drain on the economy in the years ahead than they were in the years leading up to crash.

And, if anyone thinks that the banks have learned something about safe business practices, they have not been paying attention. What the banks have learned is that if you wreck your bank, and incidentally bring down the economy in the process, you can just send your lobbyists to Congress and the White House with empty bags and ask to have them filled up with money. The lesson is that Congress will say yes.

The politicians and the media can be counted on running to protect the banks in their hour of need. While tens of millions of people losing their jobs or their homes is just an unfortunate aspect of the modern economy, the collapse of Citigroup, Goldman Sachs, or Bank of America is a tragedy that our elites just can't fathom.

So, be prepared to endure many more years of high unemployment, under-employment and declining real wages. Upwards of two million people are likely to lose their homes in 2010 and 2011. But the good news is that the economy is recovering and the banks are alright.