Monday, May 14, 2012

Proving the Rule

Recently, JPMorgan Chase reported losing approximately $2 Billion in a trade deal. While that is a staggering amount of money, and there has been some significant fallout from this, it has also reignited debate over how we can (and whether we should) take steps to prevent these kinds of things.

Rest assured, this isn't the only scandal to rock the business world this week, as three former GE execs were convicted of fraud in New York. But the fact that JPMC, one of the largest investment firms in the world, would so quickly lose so much throws us back into the debate over financial regulations in the marketplace.

On the one hand, we have Paul Krugman explaining why we regulate these kinds of things, and the ongoing struggle between federal limits and investors finding sneaky ways to continue gaming the system. On the other hand are those who normally protest oversight of financial institutions. This group is surprisingly mute on this particular incident, though it's bound to come up eventually in the "regulations drove them to it!" argument a la 2008 housing crisis.

Now, it may be true that over-regulation forces banks and financial institutions to make risky investments in order to generate capital so they can keep running. That may be true. But if that's the case, wouldn't the bank want to make sure that their investment was sound before dumping money into it? Wouldn't they want to know they could turn a profit? In other words, it's oxymoronic to think that banks would act more recklessly when there are rules to prevent them from being reckless.

Imagine for a moment if there were no regulations, or very limited regulations, on what bankers could and could not do. No limits on how high they can leverage their trades, and no oversight to monitor who is doing what. It's a free market design, applied to a "market" that does nothing but generate money out of thin air through investments. Somewhere along the line, people became confused about "free market." A free market philosophy is meant to apply to a market that produces a good or service. But the financial markets don't. They just produce cash. And giving them free reign to drive our economy into the ground in the name of wealth is just ridiculous.
So, the JPMC issue reaffirms the need for strict oversight and regulation of the financial markets. At the very least, it demands that we start discussing the role of financial regulators, what their powers should be, and what should be off-limits for these big banks. As Krugman points out, and as we should all be well-aware, financial boondoggles in the private sector can have huge impacts on the global economy, especially when the institution doing to boondoggling is backed by tax dollars as JPMC is.

UPDATE: Someone has defended JPMC. And wouldn't you know it, it's none other than Mitt Romney. A Romney advisor reported that the loss of money at JPMC was part of free market capitalism and risk, and has no bearing on taxpayers. That last bit is particularly interesting, since JPMC has its banking assets backed by the federal government, meaning it is the taxpayers that could have to dish out money for JPMC.

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