"We've just seen an object demonstration of why Wall Street does, in fact, need to be regulated. Thank you, Mr. Dimon" (Paul Krugman)

(Thanks to C. Jerry Kutner Jr. on Bright Lights After Dark film-comment blog)

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.

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.

-- Paul Krugman, in his NYT column today,
"Why We Regulate"

by Ken

I've already had my say on the subject of listening to bizniz elites on the subjct of bizniz regulation, namely "As the JPMorganchase mess reminds us, the health of the economy is too important to allow the bizniz elites to have any say in overseeing it." Since we Americansprize our tradition of free speech, we really can't just say to them: "You'll keep your damn yap shut if you know what's good for you." We could try saying, "You'll keep your damn yap shut if you give a damn about what's good for the country," but I wouldn't hold my breath on that one. I think the best we can do is enforce a strict policy of not paying them no never mind when they feel the need to regurgitate some of their alleged wisdom.

Today Paul Krugman is making a slightly narrower point: "[W]hat 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." This isn't quite the same as saying that anyone who pays the slightest attention to any economic policy urgings of elite biznizpeople, based on their supposed expertise, is a damned fool, because while they unquestionably have expertise, they never share that. What they bring to bear in their public utterances about economic policy is a mandate they believe comes both from God and from their fiduciary responsibility to lie, cheat, and steal whenever they sincerely believe it is necessary for them to do so in order to make an extra buck. (The funny part is that sometimes they not only don't make a buck, they lose a couple of billion of them. Who's the joke on now?)

Nevertheless, I'm happy to accept our Paul's view as far as it goes. He's careful to remind us that it isn't the government's business that biznizpeople are blunder-prone.

[T]hey 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.

What's so special, you may ask, about banks? Glad you asked.

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.

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. 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.

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?

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.

"The key point," says our Paul, "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."

Fair enough. But maybe we wouldn't be in this mess if everybody had had the sense to pay no attention when Jamie D was mouthing off about the evils of gummint regulation.

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