Wednesday, January 19, 2011

Good Thing Goldman's Earnings are Down

It's a good thing Goldman Sachs just reported that its 4th quarter 2010 earnings are down 52%. Not for its officers, employees, or shareholders, but for the economy and the nation. Too much capital has flowed into financial services. Too much of America's talent and energy has gone into financial engineering. If creating and trading cleverly concocted financial side bets becomes less lucrative, maybe some of the nation's best and brightest will devote their careers to something that has lasting value.

It's really not surprising that Goldman's earnings are down. The financial crisis of the past three years caused the derivatives market to contract sharply. Too of these contracts that were too clever by half proved to be pigs in pokes, and investors grew twice shy. Derivatives, enveloped in opacity, commanded high margins. Without this lucrative business, and in an uncertain economy where clients didn't want to take big risks, Goldman's financial performance was bound to lag.

One wonders if Goldman's personnel are taking the news a bit too hard. Almost surely they had an inkling of what was coming before it was announced. GS's stumble in the rather public Facebook private placement may smack of an investment bank trying too hard to buttress its reputation for prowess on the eve of a decidedly downcast earnings announcement. Sometimes, it's better to go with the flow. Capitalism is cyclical. Exceptions aren't made for even the best investment banks. And that's good, because America can't retain its standing as a world power through financial intermediation. China has become the second most powerful nation in the world with a financial system that is rudimentary compared to ours. America needs to return to its economic roots and concentrate on producing things of value.

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