HomeLatest ThreadsGreatest ThreadsForums & GroupsMy SubscriptionsMy Posts
DU Home » Latest Threads » Forums & Groups » Main » General Discussion (Forum) » Paul Krugman: Why We Regu...
Introducing Discussionist: A new forum by the creators of DU

Sun May 13, 2012, 10:26 PM

Paul Krugman: Why We Regulate [View all]

http://www.nytimes.com/2012/05/14/opinion/krugman-why-we-regulate.html

OP-ED COLUMNIST

Why We Regulate

By PAUL KRUGMAN
Published: May 13, 2012

- snip -

As far as we know, Jamie Dimon, 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.

- snip -

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.

- snip -

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, 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.

- snip -

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.

MORE

10 replies, 2460 views

Reply to this thread

Back to top Alert abuse

Always highlight: 10 newest replies | Replies posted after I mark a forum
Replies to this discussion thread
Arrow 10 replies Author Time Post
Reply Paul Krugman: Why We Regulate [View all]
Hissyspit May 2012 OP
Dawson Leery May 2012 #1
unkachuck May 2012 #2
ibegurpard May 2012 #3
limpyhobbler May 2012 #4
suffragette May 2012 #5
SpankMe May 2012 #6
Hissyspit May 2012 #7
Egalitarian Thug May 2012 #8
Egalitarian Thug May 2012 #9
WillyT May 2012 #10