For some, this will look more like a feature than a bug.  For those who know that Wall Street firms provide key capital for economic expansion, however, the massive slowdown in investor transactions will be a dark portent indeed of economic malaise for the next several years.  Two years of unprecedented class warfare makes this news entirely unsurprising except to the media that have led the charge:

Inside the great investment houses on Wall Street, business has taken a surprising turn — downward.

Even after taxpayer bailouts restored bankers’ profits and pay, the great Wall Street money machine is decelerating. Big financial institutions, including commercial banks, are still making a lot of money. But given unease in the financial markets and the economy, brokerages and investment banks are not making nearly as much as their executives, employees and investors had hoped.

After an unusually sharp slowdown in trading this summer, analysts are rethinking their profit forecasts for 2010.

The activities at the heart of what Wall Street does — selling and trading stocks and bonds, and advising on mergers — are running at levels well below where they were at this point last year, said Meredith Whitney, a bank analyst who was among the first to warn of the subprime mortgage disaster and its impact on big banks.

Worldwide, the number of stock offerings is down 15 percent from this time last year, while bond issuance is off 25 percent, according to Capital IQ, a research firm. Based on these trends, Ms. Whitney predicts that annual revenue from Wall Street’s main businesses will drop 25 percent, to around $42 billion in 2010, from $56 billion last year.

How exactly does this qualify as a surprise?  Congress passed a massive expansion of regulation on Wall Street at the beginning of summer; in fact, it’s the only action they’ve taken in two years of which voters approve.  The new regulatory regime was intended to limit creativity and innovation in investor instruments, and the natural consequence of such action is to get less production in the end.

And guess what that also means?  More unemployment.  The banking sector will shed somewhere between 40,000 and 80,000 jobs according to Whitney, which is about 10% of the total number employed in the industry.  It also means fewer loans to businesses and individuals, which will mean less expansion, less growth, and no job creation in the next few years.

No one doubted that Wall Street regulation needed some updating to cover new practices and instruments.  However, the action by Congress this year was punitive in nature, and in any case didn’t address the actual root cause of the collapse, which was the social engineering conducted by Congress itself in the housing markets through Fannie Mae and Freddie Mac.  The wages of that punitive action will be felt not just on Wall Street, but on Main Streets everywhere as capital dries up or moves overseas, and Wall Street becomes a secondary trading and investment center worldwide.