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, isnt planning anything similar. He has, however, been fond of giving Gatewood-like speeches about how he and his colleagues know what theyre doing, and dont need the government looking over their shoulders. So theres a large heap of poetic justice and a major policy lesson in JPMorgans 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 werent 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 Streets 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; everythings 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 weve just seen an object demonstration of why Wall Street does, in fact, need to be regulated. Thank you, Mr. Dimon.
MORE[p]