Monday, May 14, 2012

All Together Now

The headline on my news summary page was clear enough: “After the JPMorgan Chase mess, we must bust up the big financial houses.”

My first impression was the source had to be The Progressive, Democratic Underground, Michael, or some other ultra-liberal web page interested in fomenting an ill-defined revolution against Wall Street capitalists. Not so.

When I looked at the byline, I couldn’t believe my eyes.  The article was by ultra-conservative economist Peter Morici, and the publisher was none other than Fox, a conservative medium accused by some of being slightly right of Benito Mussolini.

Morici was commenting on a bad bet by investment bankers at JPMorgan that resulted in a $2 billion dollar loss.  Yes, this is the same outfit we taxpayers bailed out after similar shady and risky business by it and other big banks nearly caused the collapse of the world financial system.

Morici details recent history of the deregulation of U.S. banking and the reasons why a strict return to the separation of commercial and investment institutions once dictated by the Glass Steagall Act would not be good policy in today’s banking environment.  “Ho, hum,” I thought.  “The headline was a come on; this story really is just another justification for letting the self-proclaimed wizards of finance operate any way they want.”

Then came the shocker.  Here are Morici’s concluding paragraphs:

“The simplest solution is to once again separate commercial and investment banking, as was required by the Glass Steagall Act, with some modest exceptions.

“Let banks take deposits and make loans, and sell those to investors through investment banks who would do the bundling of loans into securities. Even let commercial banks own securities backed by loans in other regions to balance default risk, but leave the business of making markets and trading to separate investment banks.
“Commercial banks would continue to be regulated and government insured by the FDIC, and investment banks would be free to trade and take risks with their stockholders capital. If the latter failed from foolish trades their investors would lose their capital, but the taxpayer would not be on the hook.”

What a remarkable dose of common sense.  Hurry up, Republicans, and introduce legislation to make this conservative position become reality.  It probably would be approved by record majorities in both houses, and President Obama would sign it into law in about 30 seconds. 

Of course, this medicine would leave the investment banks with no regulation at all, an undesirable situation, but that could be analyzed and adjusted if needed later. The major problem would be removed--financial institutions “too big to fail” gambling with other people’s money and depending on taxpayers to save them when they lose the bets.

It’s high time to quit fiddling around with halfway controls like the 2010 Dodd Frank law, which contained too many compromises to be fully effective.  It’s time to get to the heart of the problem and solve it for the common good. 


Kay Dennison said...

Interesting!!! But I have to remind myself that even a stopped clock is right twice a day.

Sightings said...

Good post -- you're probably right. But even in the best of times, I never really trusted the banks. Anyway, I happen to have my checking account at Chase, and so this morning I made sure to check the account online -- just to make sure they aren't taking a few bucks out to cover the $2 billion they lost. (Whew ... they didn't!)

schmidleysscribblins, said...

According to what I have heard no one really understands quite what happened (PBS Newhour 5/14).

This problem begs the question of if they lose investor's money but don't ask the taxpayers for a bailout, does the government have a role? JP Morgan was one of the few banks the Feds did NOT bail out recently.

Another point I heard was that the new Volker rules would not have made a difference (Levin disputes this).

Plenty of the Fox contributors and others agree with your point that the investment and commercial banking should be separated again, ala Glass-Steagal.(Check the Fox Business Channel if you don't already watch it).

This is not a Conservative vs Socialist fight. Don't forget it was Bill Clinton who killed Glass-Steagal in the 1990s.

This whole issue is very complicated and no knee-jerk response will eliminate human greed, AND government regulation might hurt (especially the small banks). My 2 cents. Dianne

Dick Klade said...

JP Morgan Chase got $25 billion in TARP bailout money.

Glass-Steagall's revocation was bipartisan. Republicans controlled the Congress that passed the measure; Democrat Clinton signed it.

I don't think there really is a question of a legitimate role of government in protecting its citizens from predators. The question always is what degree of regulation is proper.

We know for certain what kind of disaster deregulation created. It seems hardly worthwhile to try more doses of bad medicine.

Absolutely agree this should not be an issue between competing ideologies. It should be resolved for the common good.

Kay Dennison said...

Yes, but that would make sense and in today's political climate where many have sold their souls to the the greedy, it simply won't happen until sensible people take a stand.

schmidleysscribblins, said...

You mean Clinton could not veto the bill? He signed the bill to promote financial liquidity which is still an issue.

Yes, regulation is important, but

1/ we must always ask, how does it affect the little business (a major complaint about Dodd Frank); and

2/ what makes us think a government official will do a better job than the marketplace? Perhaps some companies should be allowed to fail?

According to Larry Summers, the Obama Adinistration had the chance to rein in Wall Street and chose not to act (also read Gretchen Morgenson and Rosen (good book).

I say mend, don't end Government Regulation of banks. Begin by reinstating a modified version of Dodd Frank. The first step would be to bring back the separation between Investment and Commercial banking as you suggest.

joared said...

I don't recall, but possibly the Republican Congress could have over-ridden a presidential veto, or maybe signing the bill was a demonstration of bipartisanship.
Or, maybe Clinton was in bed with the financial markets.

I, too, understand Chase did not need a TARP bailout, but didn't they all have to accept monies?

As for watching Murdoch's Fox, I have no respect for them as a truthful and honest news conduit.
The other networks may not be perfect, but Fox blatantly warps the facts.

A totally free financial market with no regulation would be a disaster in my humble opinion. I agree banks need separation from investing in the gambling manner in which Morgan lost these billions, even it was only about 1% of their monies and didn't trigger need for a bailout. It's clearly a canary in the mine since the problems that brought on our most recent financial recession/depression haven't been fixed. I think Glass-Steagall Act reinstatement would be a good starting point.

You've really summed up the picture well here, Dick.

JHawk23 said...

Good thoughts. Agree that current "regulations" are only halfway measures.

I'm cynic enough to suggest that there is never any permanent solution to these ongoing yin-yang struggles. Close a door to abuse here, and within a few years, if not months, some clever financial whiz will have figured out how to open a new window that yields the same result (more profits, and somebody gets a screwing). That's exactly why those guys get those exhorbitant salaries, and why government efforts to restrain always lag behind.

Nonetheless, we do need to try. A wild-west financial system serves no one in the long run, but unfortunately does over-serve some in the short run.