Goldman earned more than $1 billion a month in the second quarter – much of it from scavenging on fixed income, currency and commodities deals created by the credit crisis.

About six months ago, Goldman itself was on its hands and knees looking to get a part of Hank Paulson’s $700 billion TARP fund. Back then, Goldman posed a “systematic risk” to the system. Handily, the firm’s former CEO happened to be Treasury Secretary. And Goldman was granted bank holding status and TARP rescue money lickety-split.

Back in the last depression, the Pecora Commission went straight for bankers’ gonads. Examples were set. Bigwigs were forced to resign. And landmark legislation was put in place (think Glass-Steagall) to keep the “banksters” in their place.

These days are different. Washington seems less keen to go after their pals on Wall Street or ask too many awkward questions. Instead, the pols are rejoicing in Goldman’s record profits and desperately trying to forget about all those billions in tax dollars they recently handed over to the nation’s top bankers.

Of course, not all bankers are created equal. And former Goldman Sachs CEO and then Treasury Secretary Hank Paulson had no intention of extending your hard-won tax dollars to just any old bank.

Goldman’s competitor Lehman Brothers needed cash too. It had earlier claimed to be “too big to fail” and a “systematic risk.” But the feds were having none of it. Bank holding company status was withheld. And Lehman brothers, like Humpty Dumpty, “had a great fall.”

(Oddly, or perhaps not oddly at all, considering the established close ties between Goldman Sachs and Washington, Lehman’s demise has greatly helped Goldman. The reduction in competition has greatly benefitted Goldman’s bottom line.)

So what is Goldman doing with the money? Well, we hate to break it to you, folks, but it’s not saving it for a rainy day. According to Barron’s, having saved roughly $600 million by issuing FDIC-backed debt with yields reflecting the government’s guarantee, Goldman has managed to set aside some $11.4 billion for compensation in this year’s first half. This works out to an annualized $770,000 “for each chief, cook and bottle-washer at the firm.”

Of course, saving for a rainy day is something a bank might do if it knew that it couldn’t rely on its connections in the upper echelons of government (and taxpayers’ generosity) should things get a little hairy again down the line. Or as Bill puts it less prosaically: “like a welfare queen in a pink Cadillac, it spends every penny, confident that it can lean on the feds next month as well as the last.”

But surely, some would say, Goldman’s bumper quarters mean the banking crisis and the economic crisis are over. Surely it’s now time to rush back into stocks, switch on Cramer and let the money start rolling in again. Perhaps, dear reader, perhaps. But as always, things aren’t quite what they seem. This from Bill in yesterday’s Daily Reckoning:

But now, look. After all our whining and complaining about the bailouts – they must be working, right? The big banks are making money again… big money. And that must mean the economy is on the mend. They’re lending… they’re speculating… they’re rolling the dice and… hallelujah… a pair of boxcars!But wait. Ken Lewis of Bank of America says, “Profitability in the second half of the year will be much tougher than the first half…”How come?

Because the banks’ core business is actually getting worse! The core business of banking is lending to people who are capable of paying it back – out of earnings. If the borrower is counting on higher house prices…or higher stock prices… to allow him to refinance on better terms, the lender is asking for trouble. Prices may go up… or they may go down. And if they go down, down goes the lender’s collateral too… and his hope of getting repaid.

The banks made big mistakes in the bubble years. And now they’re paying the price. But so far, they’ve only made the first installment payment. Subprime loans started going bad two years ago. Then, people began losing their jobs… and loans of all sorts were in trouble.

There is no sign that this process is over. Instead, it is merely proceeding in good order… just as you’d expect.

California lost another 65,000 jobs in June. And in Pennsylvania, 17,800 people are running out of jobless benefits. This group is on the cutting edge of a huge new trend – people not only unemployed, but out of unemployment benefits. One estimate says there will be more than half a million of them nationwide by the end of September. You think they were cutting back on spending last month? Let’s see what they do in October. And let’s see what happens to their debt… those Alt-A, jumbo, and prime mortgage loan…

… and let’s see what happens to credit card debt…and to commercial loans too. There’s a report that New York commercial properties are running up towards a 23% vacancy rate… Shoppers not shopping… stores and restaurants closing their doors… unemployment going up – sounds like the depression might not be over yet…