The good folks at Bloomberg, no group of raving socialists have some graph pr0n.

What they are showing is something very basic: That when profits (and not stated, remuneration) in the financial industry skyrocket, this is not a sign of health in the economy, this is a sign of sickness.

It means that enormous amounts of resources are being redistributed to non-productive activities, essentially bankers shafting their customers and pocketing the difference:

In July 2008, [Deutsche Bank AG strategist Jim] Reid said that U.S. banks had made “excess profits” of about $1.2 trillion in the previous decade, compared with how much they should have made based on economic growth, and that those excesses would be wiped out. Since then, U.S. financial firms have written down the value of their assets by about $1.15 trillion, according to Bloomberg data.

“We are now all well aware that rather than overhaul a financial system that arguably contributed to the problems of the last two to three years, the authorities have created the conditions for the industry to thrive,” Reid wrote this week. “Only time will tell how the regulators and politicians will decide to address these imbalances.”

In any case, I spotted it on Kevin Drum’s blog, and he found it at Paul Kedrosky’s blog, but he begs to differ with Mr. Kedrosky’s analysis.

You see, Mr. Kedrosky’s thesis is that with rates at 0%, and the finance industry still not supplying the lubricant that keeps the economy moving particularly well, that even bad bankers can make a profit.

Mr. Drum, and I agree, sees the role of the bankers somewhat differently :

Wall Street is only full of bad bankers if you think the role of bankers is to provide efficient financial services to the rest of the economy. If you adopt the more correct attitude that the role of bankers is to make lots of money for bankers, then America has the best bankers in the world. And they’re proving it yet again.

(emphasis mine)

This is, of course the problem: What is good for the banks is increasingly bad for the country, which is why the finance industry, and all of the FIRE sector (Finance, Insurance, and Real Estate) needs to be shrunk back to historic levels of society.

Until one of the goals of regulation is a recognition that the FIRE sector is basically parasitic once it expands much beyond the bare minimum required, then part of the solution is to shrink it, and this needs to be an explicit goal of any new regulatory regime.

^*It’s a reference to Damon Knight’s (very) short story eripmaV. Read the story, or buy the T-shirt with the story printed in full on it.

We have a couple new developments, first was that Merrill Lynch told both the SEC and the Federal Reserve Bank of New York that Lehman was cooking the books:

Securities and Exchange Commission and Federal Reserve officials were warned by a leading Wall Street rival that Lehman Brothers was incorrectly calculating a key measure of its financial health months before its collapse in 2008, people familiar with the matter say.

Former Merrill Lynch officials said they contacted regulators about the way Lehman measured its liquidity position for competitive reasons.

…

he findings raise questions over what federal regulators knew about Lehman’s accounting and when they knew it. In the account given by the Merrill officials, the SEC, the lead regulator, and the New York Federal Reserve were given warnings about Lehman’s balance sheet calculations as far back as March 2008.

Former and current Fed officials say even in the competitive world of Wall Street, it is un­usual for rival bankers to relay such concerns to the Fed.

It takes an awful lot to get one investment bank to rat out another, the first rule of Wall Street is never tell the regulators, and and the Federal Reserve Bank of New York, president Timothy “Eddie Haskell” Geithner, as well as the SEC, which was largely deferring to the NY Fed, decided to ignore it.

Actually, it’s more. Not only did Geithner’s Bank ignore the reports, it bought junk grade debt from Lehman in violation of the law:

As Lehman Brothers careened toward bankruptcy in 2008, the New York Federal Reserve Bank came to its rescue, sopping up junk loans that the investment bank couldn’t sell in the market, according to a report from court-appointed examiner Anton R. Valukas.

The New York Fed, under the direction of now-Treasury Secretary Tim Geithner, knowingly allowed itself to be used as a “warehouse” for junk loans, the report says, even though Fed guidelines say it can only accept investment grade bonds.

Meanwhile, the Fed and Geithner both strongly oppose a congressional measure to authorize an independent audit of the central bank and its lending facilities. The provision passed the House but is under attack in the Senate, where Banking Committee Chairman Chris Dodd (D-Conn.) says he hopes to stop it.

Without an audit, the Fed is able to conceal the specifics of what it holds on its balance sheet. If the Lehman deal is any indication, the Fed is hiding billions of dollars in toxic loans on its books.

“The Fed legally is forbidden from taking such assets. There’s a legal requirement that the Fed’s assets be investment grade,” Rep. Alan Grayson (D-Fla.) told HuffPost. Grayson, who is the cosponsor of the Grayson-Paul Audit the Fed measure that passed the House, said the Lehman scandal shows precisely why such an audit is needed.

Seriously, he cheated on his taxes, he’s aided and abetted the pervasive accounting fraud at Lehman, and he’s still in the bank’s pocket.

I understand that his successor will face a filibuster, but please, fire him, and go with a recess appointment.

It doesn’t matter that he knows where the bodies are buried if he’s a part of the gang what murdered the economy, and he’s still working flashing gang symbols to Dimon and Blankfien.