Wall Street is shrinking

Yesterday, the headline on Yahoo Finance was Get Ready For The Fixed Income Bloodbath. The short article described the increasingly dire employment situation on fixed income trading and brokerage desks throughout Wall Street.

Fixed income desks are going to be subject to severe layoffs, according to a highly placed Wall Street insider with information about the plans of his firm and the plans of rivals. "It's going to be a blood bath. Volume is down for everything except Treasuries and Munis. These guys aren't making money and soon they'll be out of their jobs."

Today, Andy Kessler, a frequent columnist at WSJ writes:

“In my estimation, there are too many traders, bankers and salesmen to support the new level of business. Wall Street firms also have too much capital that they scramble to generate returns on. Both need to shrink over the next five years."

According to Arnold Kling over at Econlog, this is what the financial crisis was largely about. In other words, it was the market's way of shouting "the financial sector is too big and it needs to shrink". In the midst of the financial crisis back in September 2008, Kling wrote in an open letter to Ben Bernanke:

Today, it is clear that the U.S. financial sector needs to shrink. As another one of your former classmates, Ken Rogoff, has pointed out, the financial sector has accounted for an unusually large share of corporate profits in recent years. It is time for this country to shift talent and capital elsewhere. In order for that to happen, some firms in the industry need to tighten their belts, some weaker firms need to merge with stronger firms, and the weakest firms need to fail.

I also recall around that time one of the regulars on CNBC's Fast Money saying something to the effect of: "For too long, we have had way too much financial engineering and not enough real engineering. That's going to change."

So maybe that is what is happening. Despite TARP and despite 0% Fed Funds rates that usually ensure bank profits, profits and stock prices are down on Wall Street, which is the market's way of telling us that Wall Street still needs to downsize. And it looks like it may be happening. But fortunately for those in the cross-hairs, it's just happening very slowly thanks to TARP and 0% Fed Funds rates.