Make no mistake, the boom in finance is over, says Bill Bonner in The Daily Reckoning.

Sure, some banks may bounce back, but they won’t again reach the dizzy profits of the last five years for a long time. During this period banks made billions in profits and bonuses by lending money to people who couldn’t pay it back. Now they are looking to the taxpayer for handouts to cover these bad loans.

So how come nobody on Wall Street has offered to pay back their bonuses?

Readers unfamiliar with modern macro-monetary theory would probably like to stay that way. But that doesn’t stop us from limbering up in order to pitch the system at you.

Last November, Wachovia Bank (NYSE:WB) of the Tar Heel State was worth more than $100 billion. Two weeks ago, it was worth $20 billion – after confessing a loss of more than $8 billion in the second quarter. Buy yo ho… week it was back up to $37 billion.

What’s going on? Well, many people will tell you that the banks are coming back. Don’t believe it. The boom in finance is over, as the vast majority of our speakers at last week’s Agora Financial Investment Symposium pointed out. Two more banks failed over the weekend – First Heritage of California and First National of Nevada.

Even the survivors will never recover to the glory-days levels they had a year or two ago. That doesn’t mean they won’t have some spectacular bounces. As they say on Wall Street, even dead cats bounce. But it will be a very long time before the big banks enjoy the kind of profits they made back in 2003-2007 – when they made billions by lending to people who couldn’t afford to pay it back.

Let us explain how the financial industry worked. A guy borrowed some money from some other guy who borrowed the money from some other guy who borrowed the money from the Fed at a lower rate than the going rate of consumer price inflation. Then, the lender booked a profit on the transaction and paid himself a bonus…while selling the loan on to someone else, whereupon both of them booked a profit and paid more bonuses. Then, the loan was packaged up with similarly infected credits, rated AAA by Moody’s (NYSE:MCO), and then sold on again – and again, everyone involved in the transaction, including the cleaning lady, booked a profit and got a bonus.

In the four years leading up to the credit crunch Wall Street’s big banks paid themselves $250 billion in bonuses. It didn’t seem to matter to anyone that the source of the wealth was largely a swindle… that real profits would never be realized. Now, the banks are writing off the bad loans… and turning to the taxpayer for a handout. But no one has offered to return a bonus, as far as we know.

Of course, this is just the genius of modern Anglo-Saxon capitalism – the most capitalist institutions pay out their capital in bonuses. Then, when they get in a jam, they turn to the taxpayer for relief. Of course, the taxpayer spent all his money too. He’s lucky to be able to fill his gas tank – with a credit card! Which is why Hank Paulson is so eager to deceive the world. He knows that if the foreigners ever catch on to what a scam the United States is running, they’ll stop lending it money. And then, Wall Street, Washington, and the lumpenconsumer himself are all up the creek.

Source: Dead Cat Bounce