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<div class="timestamp">May 13, 2012</div>
<h1>Why We Regulate</h1>
<span><h6 class="byline">By <a rel="author" href="http://topics.nytimes.com/top/opinion/editorialsandoped/oped/columnists/paulkrugman/index.html?inline=nyt-per" title="More Articles by Paul Krugman" class="meta-per">PAUL KRUGMAN</a></h6>
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<p>
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. </p>
<p>
As far as we know, <a href="http://topics.nytimes.com/top/reference/timestopics/people/d/james_dimon/index.html?inline=nyt-per" title="More articles about James Dimon." class="meta-per">Jamie Dimon</a>,
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. </p>
<p>
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.
</p>
<p>
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. </p>
<p>
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. </p>
<p>
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. </p>
<p>
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? </p>
<p>
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 <a href="http://topics.nytimes.com/top/reference/timestopics/subjects/v/volcker_rule/index.html?inline=nyt-classifier" title="More articles about the Volcker Rule." class="meta-classifier">Volcker Rule</a>,
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. </p>
<p>
Apparently not. </p>
<p>
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. </p>
<p>
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. </p>
<p>
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.
</p>
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<br><br><div class="gmail_quote">2012/5/16 Tom Hansen <span dir="ltr"><<a href="mailto:thansen@moscow.com" target="_blank">thansen@moscow.com</a>></span><br><blockquote class="gmail_quote" style="margin:0 0 0 .8ex;border-left:1px #ccc solid;padding-left:1ex">
<br>
<br>
Seeya round town, Moscow.<br>
<br>
Tom Hansen<br>
Moscow, Idaho<br>
<br>
"If not us, who?<br>
If not now, when?"<br>
<br>
- Unknown<br>
<br>
<br>
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