[Vision2020] Deregulation

Art Deco art.deco.studios at gmail.com
Wed May 16 11:35:44 PDT 2012


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May 13, 2012
Why We Regulate By PAUL
KRUGMAN<http://topics.nytimes.com/top/opinion/editorialsandoped/oped/columnists/paulkrugman/index.html?inline=nyt-per>

One of the characters in the classic 1939 film “Stagecoach” is a banker
named Gatewood who lectures his captive audience on the evils of big
government, especially bank regulation — “As if we bankers don’t know how
to run our own banks!” he exclaims. As the film progresses, we learn that
Gatewood is in fact skipping town with a satchel full of embezzled cash.

As far as we know, Jamie
Dimon<http://topics.nytimes.com/top/reference/timestopics/people/d/james_dimon/index.html?inline=nyt-per>,
the chairman and C.E.O. of JPMorgan Chase, isn’t planning anything similar.
He has, however, been fond of giving Gatewood-like speeches about how he
and his colleagues know what they’re doing, and don’t need the government
looking over their shoulders. So there’s a large heap of poetic justice —
and a major policy lesson — in JPMorgan’s shock announcement that it
somehow managed to lose $2 billion in a failed bit of financial
wheeling-dealing.

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.

So what can be done? In the 1930s, after the mother of all banking panics,
we arrived at a workable solution, involving both guarantees and oversight.
On one side, the scope for panic was limited via government-backed deposit
insurance; on the other, banks were subject to regulations intended to keep
them from abusing the privileged status they derived from deposit
insurance, which is in effect a government guarantee of their debts. 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 system gave us half a century of relative financial stability.
Eventually, however, the lessons of history were forgotten. New forms of
banking without government guarantees proliferated, while both conventional
and newfangled banks were allowed to take on ever-greater risks. Sure
enough, we eventually suffered the 21st-century version of a Gilded Age
banking panic, with terrible consequences.

It’s clear, then, that we need to restore the sorts of safeguards that gave
us a couple of generations without major banking panics. It’s clear, that
is, to everyone except bankers and the politicians they bankroll — for now
that they have been bailed out, the bankers would of course like to go back
to business as usual. Did I mention that Wall Street is giving vast sums to
Mitt Romney, who has promised to repeal recent financial reforms?

Enter Mr. Dimon. JPMorgan, to its — and his — credit, managed to avoid many
of the bad investments that brought other banks to their knees. This
apparent demonstration of prudence has made Mr. Dimon the point man in Wall
Street’s fight to delay, water down and/or repeal financial reform. He has
been particularly vocal in his opposition to the so-called Volcker
Rule<http://topics.nytimes.com/top/reference/timestopics/subjects/v/volcker_rule/index.html?inline=nyt-classifier>,
which would prevent banks with government-guaranteed deposits from engaging
in “proprietary trading,” basically speculating with depositors’ money.
Just trust us, the JPMorgan chief has in effect been saying; everything’s
under control.

Apparently not.

What did JPMorgan actually do? As far as we can tell, it used the market
for derivatives — complex financial instruments — to make a huge bet on the
safety of corporate debt, something like the bets that the insurer A.I.G.
made on housing debt a few years ago. The key point is not that the bet
went bad; it is that institutions playing a key role in the financial
system have no business making such bets, least of all when those
institutions are backed by taxpayer guarantees.

For the moment Mr. Dimon seems chastened, even admitting that maybe the
proponents of stronger regulation have a point. It probably won’t last; I
expect Wall Street to be back to its usual arrogance within weeks if not
days.

But the truth is that we’ve just seen an object demonstration of why Wall
Street does, in fact, need to be regulated. Thank you, Mr. Dimon.


2012/5/16 Tom Hansen <thansen at moscow.com>

>
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> Seeya round town, Moscow.
>
> Tom Hansen
> Moscow, Idaho
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> "If not us, who?
> If not now, when?"
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-- 
Art Deco (Wayne A. Fox)
art.deco.studios at gmail.com
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