What the Profit Tumble at the Big Banks Means for the Economy

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Jonathan Ernst / Reuters

When Goldman Sachs can’t make money you know times are tough in the banking business. In mid-September I wrote a feature story for TIME magazine about how our nation’s banks, despite the bailout, were far from fixed, and how that was dragging down the economy. This week’s earnings reports from the big banks are new evidence of how true that is.

In the past week, the nation’s biggest banks told investors how well they did in the third quarter of the year. The news wasn’t good. Goldman had its second quarterly loss since going public. Profits at J.P. Morgan fell 4%, but that was only because of a paper gain that added $2 billion to the bank’s bottom line. Without it, profits at J.P. Morgan, which is now officially the biggest bank in the nation, would have fallen by almost 50%. Accounting gains at other banks made up a big portion of their profits as well. For instance, Bank of America reported that it earned $6.2 billion in the quarter. But take out all the one-time, albeit totally legitimate-at least as far as I can tell-accounting charges, and Bank of America’s true earnings were about $2.7 billion. The story was even more true at Morgan Stanley, which for the past few weeks has been dogged by rumors that its European exposure could put the bank in jeopardy. Overall, Morgan Stanley said its bottom line in the quarter grew to $2.15 billion, up from $91 million in the same three months a year ago. However, take out accounting gains, and Morgan Stanley’s earnings dropped to $37 million, down nearly 60% from a year ago.

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Perhaps a better sign of how the banks were doing was to look at revenue, which at all the big banks is now falling. Fewer people want to use their services. That never happened before the financial crisis. Revenue was always rising. During the financial crisis, the bank executives often argued that the banks were effectively healthy, just being maligned down by some accounting rules that were making their operations look sicker than they were. We now have the opposite story: Accounting rules are masking just how sick the banks are.

What does this all mean?

Perhaps more so than other industries, or maybe just because of the excesses in banking in the past few years, we have a unique relationship with bank earnings. We don’t like them, yet higher bank earnings would be good for the economy and everyone in it, including the 99%. And when banks announce things like $5 debt card fees that would boost earnings, we don’t like it.

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Yet, we need the banks to recover. The best way to do that is to give them the ability to lend. That is after all how banks make money. What’s more, more loans are exactly what we need right now to boost jobs. Nearly three-quarters of small businesses still report problems getting financing. Yet, bank lending has barely recovered from the financial crunch. Instead, banks are hoarding cash to prove to investors and regulators that their balance sheets are safe and no further banking crisis is in the cards.

But it isn’t working, investors are still fleeing the bank stocks on fears that the banks’ mortgage problems and exposure to European debt problems are much larger than they appear. And that makes bank executives even less willing to make new loans. And so the banks are stuck, and with them so is the economy and the rest of us.

There are a number of things that could be done. The easiest perhaps would be to have another round of stress tests. That would give investors more faith in the truly healthy banks. Second, the government needs to push forward a plan to deal with all the foreclosures. Uncertainty over what will be done with underwater homeowners is hurting the banks, more than the real losses they should be taking on the actual loans. No one wants to accept their mistakes. But the government needs to force the banks to do it, so we all can move on.

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Another option would be to create a program where the government offer insurance to banks that make loans to companies that plan to use that money to create new jobs. This would be a win for both the job market and the banks, which get the interest income and assurances for investors that they are somewhat protected from losses on new loans. Yes, there might be some Solyndra-type failures. But if you make these government guarantees and not an actual lending program, then you keep the loan making decisions with the banks and not the government.

Most importantly, Washington policy makers, and perhaps the Occupy Wall Street folk, have to recognize that the banks are far from healthy. We don’t have to have another bailout. That actually might hurt more than it would help. But we do need to do something to jumpstart lending. That’s key to getting us out of this non-recovery recovery.

Stephen Gandel is a senior writer at TIME. Find him on Twitter at @stephengandel. You can also continue the discussion on TIME‘s Facebook page and on Twitter at @TIME.