The recent loss of $2 billion by JP Morgan Chase is the subject of today’s column by Paul Krugman. He argues that there are some things banks should not be allowed to do, because they are dangerous to the economy as a whole.
Just to be clear, businessmen are human — although the lords of finance have a tendency to forget that — and they make money-losing mistakes all the time. That in itself is no reason for the government to get involved. But banks are special, because the risks they take are borne, in large part, by taxpayers and the economy as a whole. And what JPMorgan has just demonstrated is that even supposedly smart bankers must be sharply limited in the kinds of risk they’re allowed to take on.
Why, exactly, are banks special? Because history tells us that banking is and always has been subject to occasional destructive “panics,†which can wreak havoc with the economy as a whole. Current right-wing mythology has it that bad banking is always the result of government intervention, whether from the Federal Reserve or meddling liberals in Congress. In fact, however, Gilded Age America — a land with minimal government and no Fed — was subject to panics roughly once every six years. And some of these panics inflicted major economic losses.
Krugman goes on to say that in the 1930s we came up with a workable solution involving oversight and guarantees. “Most notably, banks with government-guaranteed deposits weren’t allowed to engage in the often risky speculation characteristic of investment banks like Lehman Brothers.” This gave us “half a century of relative financial stability.” Then banks began to engage in risky speculations again, and the results were a financial disaster in 2008 in which taxpayers had to step in to prevent total meltdown.
But, predictably, the crew at Reason say that regulation is still wrong.
… the Wall Street calamities that shook the economy a few years back weren’t a result of isolated mistakes at the individual bank level. They were the result of networked failures, in which multiple market players make the same set of mistakes at the same time, taking up all the give in the system simultaneously.
Some of us would say that Chase’s $2 billion loss was something of a canary in the coal mine, showing us that there still is danger lurking in the financial sector. The correct response is to step in now to fix the bug and not wait for another system fail. And, without looking, I’m willing to guess that the crew at Reason was opposed to regulations that might have prevented the 2008 disaster also, before it happened. The “free minds” at Reason rarely surprise me.
And, of course, next they say that there’s no reason to think that more regulation would change anything, because regulations might not be implemented properly —
… “proper” implementation is always harder than it sounds. And I’m not sure we have any more reason to trust that regulators have the wisdom and judgment to prevent such losses any more or better than the bankers themselves.
This is the argument one hears every time there’s a death in a coal mine. Some mouthpiece for the coal mining industry argues that the accident shows that regulations aren’t necessary because (blah blah blah). The truth is that safety regulations passed into law in 1977 gave us nearly two decades of death-free coal mining. Then the Bush Administration turned the Mine Safety and Health Administration over to industry insiders, who weakened regulations, resulting in the loss of 70 miners in six separate disasters.
And this is supposed to prove that regulations don’t work.
Back to the financial sector — saying that a single incident (less than four years after Lehman Brothers died) doesn’t prove a need for more regulation is like saying that because there were only 4.8 homicides per 100,000 U.S. residents in 2010, we don’t need homicide laws. And those evil government prosecutors sometimes get the wrong guy convicted, anyway.
Michael Hiltzik writes in the Los Angeles Times,
The Whale affair shows that JPMorgan doesn’t understand how to manage risk. When you’re making multibillion-dollar bets using inherently volatile and unpredictable financial devices, nobody does — JPMorgan’s own risk models showed that its exposure had suddenly doubled in a period of weeks prior to its disclosure, which means either that the risk models were hopelessly outclassed, or that risk models can’t ever be reliably accurate under all conditions. Either way, it leads to the conclusion that Dimon desperately tried to evade on “Meet the Press”: that the only way to make this sort of risk-taking safe for the financial system is to make it illegal in the first place.
You really have to be pretty delusional to argue that the JPMorgan episode is not a warning that there are regulatory loopholes that need to be closed.
There’s a tacit ‘agreement’ between traders etc. and regulators, I.B.G, Y.B.G. – I’ll be gone, you’ll be gone.” So much for oversight. Also, somebody might suggest that those who engage in high risk financial practices should be liable to cover the losses out of their own pockets. Might cut down on irresponsible financial practices?
If they want to take risks, let them do it with their own and their shareholders money – with ALL money comes from them, or else the company dies.
No more “Too big to fail!”
Right now, we have Welfare and Socialism for corporations, and that’s fine with the people in power.
But for people – well, we all need to work 2-3-4 (when you can’t even find 1) jobs to maintain our “dignity.”
I guess dignity is only for us little people, and these people don’t need dignity as they take money that bailed-out their companies, and give themselves bonuses because they worked hard, and “earned them.” FTW?
Dignity is for feckin’ losers!
“Too big to fail?”
Then you’re too feckin’ big.
Break-up, and let the smaller entities take risks.
And if you want to take risks, take the consequences.
Not big enough to take the risks? Grow money until you can.
Right now, it’s like Rush waddling around on a high-wire stretched between two buildings, and everyone’s holding their breath, because Rush is ‘Too big to FALL!” – without taking out half of the damn city.
There is a REASON the event was called the Great Depression: to distinguish it from the 20 year depression cycle that had preceded it in the century prior. Every new generation proceeded to forget the lessons learned (the hard way) by their parent’s generation.
Then, following Roosevelt and his reforms, there was 60 years without a very serious recession, let alone a depression. The results of Republican “reforms” were quite a stark contrast…
Does anybody besides us listen to PK? By the way, does my new MacBookPro make my comment look better? First comment posted from my new chariot of aluminum!
By the way, does my new MacBookPro make my comment look better?
It doesn’t look better from this end, but I’m sure it looks better from yours.
Here’s a partial list of Campaign Contributors from the Banking Sector by Company.
(Source OpenSecrets.org – not a recommended site if you have high blood pressure)
American Bankers Assn $1,152,000
Independent Community Bankers of America $579,700
Bank of America $484,498
Wells Fargo $326,000
JPMorgan Chase & Co $278,499
Regions Financial $200,250
Huntington Bancshares $141,500
Citigroup Inc $136,500
But, but.. I thought companies could not contribute. They can’t except through a PAC, and the company is allowed to absorb all the costs of running the PAC (it’s called a ‘Connected’ PAC.) And from the looks of the monthly reports, most employees are enrolled in a payroll deduction plan. The company managers make the decisions on what candidates get the money and what the concerns of the PAC are. But it’s legal – barely – because the money comes from employees.
These PACs give very selectively to both parties and you won’t see real reform while they can dangle huge sums in front of legislators noses.
Here’s a bonus question – How much (excluding unlimited Super-Pacs) can ONE person give – total – per 2-year election cycle – to candidates, political parties and regular PACs. Your guess is way too low. Answer here.
http://www.opensecrets.org/overview/limits.php
Sadly, I think that if crashing the economy of the entire world in 2008 wasn’t enough to get people to notice, a little thing like Jamie Dimon losing $2 Billion isn’t going to matter much.
Though I might be wrong. They did try to implement some regulation after 2008, though the details have been wrapped up by lobbyists ever since. Maybe now it’ll be a little bit easier for someone in Congress to tell the lobbyists for the banksters that they have to accept something, if only for appearances’ sake.
Doug,
When I was management at Time-Warner, the company held meetings twice a year about everyone working there contributing to a Cable TV, later, Telecommunications PAC. They even had recommended amounts and percentages for you, depending on your level/title.
I never contributed a penny.
The PAC was to pay off the companies/industries lawyers/lobbyists to put pressure on legislators in Raliegh, NC, and DC, to do the industries bidding.
Our political system is broken. Money talks – and bullsh*t talks, walks, dances, sings, and does ‘The Hustle.”
If we don’t get the money out of politics – and FAST – we’ll join the list of broken and shattered Empires.
And maybe that’s not a bad thing.
FSM knows, we deserve it.
Except only the little people will pay the price for a shattered Empire.
Corporations, and the rich, will continue to talk, walk, dance, sing, and do ‘The Hustle†– they’ll just do it somewhere else.