When you hear about something like Wells Fargo posting record profits, I think you should resist the temptation to do what I saw some TV anchors doing this morning and start wondering if banks are in better shape than you thought. Banks are in terrible shape, and as a result of that the government is taking drastic steps to help banks out. And it’s because of those drastic steps that the banks are posting operating profits.
The main driver of the profits is that the interest rates banks need to pay is now extraordinarily low. That makes banks’ basic operations more profitable. These profits are further bolstered by the fact that banks are not, at the moment, being forced to fully account for lost investment income. And on top of that, banks are able to operate without being properly capitalized because they’ve all gotten increasingly explicit government guarantees. It would be a bit as if the government decided to save GM by just agreeing to purchase cars as fast as GM can make ’em.
Which isn’t to say that these policies are a bad idea. It’s just to observe that the profits are less a sign of recovery than they are a sign of how much policy activism we’re witnessing.