TIMOTHY NOAH MAY 11, 2012
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So let me get this straight. JP Morgan loses more $2 billion, reportedly thanks to the recklessness of a trader nicknamed “the London Whale” and “Lord Voldemort,” and all Morgan CEO Jamie Dimon has to say is “it was bad strategy, executed poorly”? Well, no, that isn’t precisely correct. Dimon also says he remains only “barely” a Democrat because the Democrats want excessive regulations, including the so-called “Volcker Rule” banning some types of proprietary trading. Of which Lord Voldemort’s misadventure would seem a particularly worrisome example.
At the risk of driving Dimon out of the Democratic party altogether, let me point out that the Volcker Rule is insufficient. Had Morgan’s trades been a bit worse the company would have gone broke and the federal government would have bailed it out. I’m sorry, Tea Partiers and Occupy Wall Streeters. As things stand today, we can’t let JP Morgan go out of business, even as Republicans seek to cut poverty programs with gleeful abandon. An inevitable consequence of another banking crisis—even one in which Morgan or any other bank were bailed out—would be additional bank consolidation that would make allowing any surviving bank to go under in the next crisis even more unthinkable. (According to Business Week, the U.S. already has fewer than half the number of commercial banks it had in 1984.)
There is another way, as David Rohde helpfully points out on Atlantic.com: Break up the big banks. Any lingering suspicion that this is some unacceptably left-wing idea was dispelled in last year’s annual report from the Dallas Fed, which says:
As a nation, we face a distinct choice. We can perpetuate [“Too Big To Fail”], with its inequities and dangers, or we can end it. Eliminating TBTF wont’ be easy, but the vitality of our capitalist system and the long-term prosperity it produces hangs in the balance.
These words, written by the head of the Dallas Fed’s research department, are wholeheartedly endorsed in the annual report by Dallas Fed President Richard W. Fisher. According to Business Week, three other Fed presidents “have voiced similar worries about the risk of a renewed crisis” if the bank concentration trend isn’t reversed. Even Alan Greenspan has said of banks, “If they’re too big to fail, they’re too big.” Exasperatingly, both Mitt Romney and Barack Obama resist breaking up the banks. At this point, that’s tantamount to endorsing the next bank bailout.
10 comments
And a high level of income inequality. It's no coincidence that the financialization of the economy, income inequality, and economic instability have occurred simultaneously. One doeesn't need an advanced degree in economics, only eyes to see. The last time we experienced the same, we chose to break up the banks, and income inequality dropped precipitously. Problem was, it was a disorderly method used to break up the banks, namely, bank failures, which both exacerbated and prolonged the economic instability. To Obama's credit, he didn't adopt the same method in 2009. But the method he chose, saving the banks, has exacerbated income inequality and prolonged economic instability. The solution, as Noah indicates, is a more orderly method for breaking up the banks (more orderly than the last method used). [The political irony is too rich: bankers have abandoned Obama and adopted Romney, yet if Romney is elected, he will owe much to the tea party voters, who would be more than willing to burn the bankers at the stake. I will supply the matches.]
- rayward
May 11, 2012 at 1:04pm
As for Dimon, Lewis, and the other bank executives, all about my age, they haven't a clue what's going in down in proprietary trading. All I need to know I learned by the time I was twelve: for every action there is an equal and opposite reaction, and for every trade that generates a profit, there is an equal loss. Those masters of the universe down in proprietary trading never learned that lesson.
- rayward
May 11, 2012 at 1:13pm
Breaking up big banks is not necessarily a panacea -- especially since it could put the resulting smaller banks at a competitive disadvantage versus their larger overseas competitors in terms of proprietary trading, hedging, private wealth management, commercial underwriting and the other stuff that actually makes money for banks and their shareholders. And having a small number of large banks that dominate the domestic market is not necessarily the end of the world -- look at Canada, which basically has five major commercial banks in the entire country and managed to practically avoid the Great Recession (same goes for Australia, another major Western country that was barely scathed by the Great Recession). Their secret is not preventing big banks from existing, but to ensure that those big banks maintain big capital reserves so that the risk of the government riding to their rescue due to a really bad series of trades or a credit crisis is very low. Of course, the Jamie Dimons of the world don't want to park a lot of their cash in the vault and make it off-limits forever, because their compensation revolves around making lots of money while keeping little in reserve. But perhaps now isn't the best time to listen to Jamie Dimon's view of things. PS -- Paul Krugman, IIRC, had made a similar argument back in 2008-19 during the height of our banking crisis. He was responding to those who would restore Glass-Steagall as a panacea to our financial woes, but the logic is the same. http://www.nytimes.com/2010/02/01/opinion/01krugman.html
- wildboy
May 11, 2012 at 1:28pm
We can make the banks small enough so that individual failures are not catastrophic, or we can reduce the likelihood of failures. I agree with Wildboy that the second option is better. In addition to the arguments he already made, I would note that 1) given the banks' race to the bottom that culiminated in the mortgage crisis, there is little reason for hope that a bunch of medium-sized banks won't simply result in a bunch of medium-sized bank failures in the future, which is just as bad as one mega-bank biting the dust, and 2) while setting high standards for capital reserves may sound like a regulatory pain in the rear, it at least has the virtue of sounding like a lighter government touch than does the outright dismantling of a bank. Not that a lighter touch is intrinsically better, but it is at least easier to sell politically.
- Fishpeddler
May 11, 2012 at 2:00pm
Glass-Stegal, which separated Banks from other more speculative Financial Institutions, was a needed and necessary part of the New Deal, and preventing "Too big to fail". It worked fine until it was repealed in 1999, then in a mere 10 years the combined banks/financial institutions used the freedom to create a CDO Ponzi scheme, which the US Treasury had to bail out. Seems a no-brainer to me to restore this absolutely necessary fire-wall as soon as possible. But even the much milder Volker Rule and Dodd-Frank face insurmountable opposition from the Republicans. Apparently, we didn't get close enough to 1928 the first time, they're going to try deregulation again. This is how we get double-dip recessions, you know.
- AllanL5
May 11, 2012 at 2:16pm
By the way, that reference to our banking crisis extending from 2008-19 was a typo, and not a prediction. I meant 2008-09.
- wildboy
May 11, 2012 at 2:51pm
I am definitely in agreement with wild and fish.
- liberalref
May 11, 2012 at 7:46pm
Wild, Fish - You make excellent points on the economics, but I think politics makes a strong case for breaking up the banks. A handful of consolidated megabanks have a lot more political clout than a whole bunch of little banks. We might, in a crisis moment, muster the will to break up those megabanks, curbing their power. Regulating them tightly leaves that power intact and requires a long-term commitment to oppose it, and that in turn demands a level of political consensus we aren't likely to reach any time soon. The first time a Republican President enters office with Republicans in control of Congress, the regulations will be torn to shreds and we'll be right back where we were.
- Dausuul
May 11, 2012 at 11:29pm
Or, if a Republican president can push a GOP Congress toward regulation, simply because reality will make it inescapable, it will be dressed up and marketed by Fox News as something different -- a patriotic American action this time around AND NOTHING AT ALL LIKE the scuzzy maneuverings of the Kenyan Socialist who won the presidency because Acorn stole the election. Remember, the Republican party supported insurance-based health care reform with an individual mandate up to just before Obama walked into the Oval Office. Then it turned into something like an evil Stalinist diktat that must be resisted at all costs.
- ironyroad
May 13, 2012 at 6:10pm
Irony, that is the kind of thinking that is causing safe Republican incumbents to lose their seats to Tea Partiers these days. They're tired of the betrayal, and they're not standing for it anymore. They want full capitulation to their demands and they're not taking anyone's BS. Lugar is gone. They ran off several others. Look how fast they threw Bush under the bus when the economy tanked.
- GSpinks
May 14, 2012 at 5:56pm