Krugman on JPMorgan and the need for regulation

New York Times columnist Paul Krugman is clearly on the more liberal end of economists;  but he makes sense to me, along with Stiglitz and Volkner.   Here's what he writes in his column today about the debacle of JPMorgan Chase bank's loss of $2 billion in some bad investments that involved manipulating debt rather than investing in making useful things.

Krugman begins by talking about JPM's CEO, Jamie Dimon, who in the past was one of the bankers who argued strongly against more bank regulations, saying that bankers know how to run their own banks and don't need the government looking over their shoulders and regulating what they are allowed to do.

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. . . .

[Bank officers] 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. . . .

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.

Laws governing banking regulations were overturned or weakened, and once again banks were allowed to take on ever-greater risks with their assets.   Newer forms of banking arose that were not covered by government guarantees.  The recession of 2008 convinced many that we needed to restore the controls that had been overturned, those safeguards that protected us from the old vulnerabities.

Because he had steered JPM rather successfully through the recent recession without needing government bailout, CEO Jamie Dimon became an effective spokesman for the banking industry's fight against restoring those regulations, or at least watering them down and creating loopholes.

He has been particularly vocal in his opposition to the so-called Volcker Rule, 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.

But it wasn't.  What JPMorgan did was apparently make a huge, risky bet on the safety of corporate debt.

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. . . . 

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

Now will they listen?    Probably the Wall Streeters won't;  they'll just look for better ways to spin such losses and resolve to be more careful next time.    What about the politicians?   There's still too much money flowing into campaign war chests from Wall Street to have much effective reform pass Congress, at least in this election year.

But at least the problem seems to be getting clearer and clearer -- for anyone who will listen to the likes of Paul Krugman and Joseph Stiglitz -- both of whom have won the Nobel Prize in Economics.  We should listen to them.

Ralph