Government running daily deficit of $4 billion lectures JP Morgan on $2 billion loss

Newsweek Magazine (February 16, 2009) ... Lend...

Some might use the old cliché: ‘the pot calling the kettle black’, but that doesn’t do justice to the absurdity of this proclamation by President Obama, which is more like the sun calling the stove hot:

“JPMorgan is one of the best managed banks there is. Jamie Dimon, the head of it, is one of the smartest bankers we got and they still lost $2 billion and counting,” Obama said on ABC’s “The View,” according to a transcript released by the network.

First, having the President of the United States imply that JPMorgan’s $2 billion loss has no end in sight is irresponsible at the least. Second, how would one of the ‘best-managed banks’ benefit from having one of the most fiscally irresponsible institutions in the country telling it what to do? This $2 billion dollar loss in one sector of JP Morgan’s business (they ran a profit overall) pales in comparison to the $1.4 trillion in annual deficits racked up by the U.S. federal government. And if Jamie Dimon is one of the smartest bankers we have, then who are the super-duper-geniuses that know better than him on how to structurally eliminate loss?  Jon Corzine?  If such people existed, the government could issue simple task lists and how-to guides, and anyone could run a profitable bank, or any business, so long as they followed it. This is obviously not the case. If our best and brightest, as Obama describes Jamie Dimon, make mistakes, then how are a group of regulators going to know better? And if these regulators also make mistakes, how is it beneficial to institutionalize these mistakes via the architecture of Dodd/Frank? At least in the current setup, Jamie Dimon can purge the failed people and failed policies. The real problem? We’ll get to that in a bit. 

The President then goes on to say:

“We don’t know all the details. It’s going to be investigated, but this is why we passed Wall Street reform,” Obama said.

While I’m still trying to understand how he made the leap from “We don’t know the details,” to “this is why we passed Wall Street reform,” I’ll stick to the intent of his statement. Liberal economist and NYTimes op-ed writer Paul Krugman is hawking a similar line of thought regarding bank losses as proof of the need for more Wall Street regulations. But the Wall Street reforms in Dodd/Frank probably wouldn’t have stopped this loss, and they shouldn’t have. Heads are rolling at JP Morgan. This loss brought to light bad business practices and decreases the probability that they will be employed again. If the federal government were run by Jamie Dimon, Tim Geithner would have been pushed out years ago.

Next we have an argument for allowing poorly managed banks to fail. Instead they’re given an implicit guarantee that if they do screw up, the government will jump in to help them:

“This is the best, or one of the best managed banks. You could have a bank that isn’t as strong, isn’t as profitable making those same bets and we (the government) might have had to step in, and that’s exactly why Wall Street reform’s so important.”

No, this is why it’s important to not create incentives for banks to become ‘too big to fail’ in the first place. And if a smaller, less profitable bank was foolish enough to take these kinds of risks, it should fail so no one else funnels money through its inept leadership and poor business practices.

People are imperfect creatures and make mistakes. Monetary losses in business are symptoms of underlying bad decision making. The bigger the loss, the bigger the problem, which signals to the company that it needs to make a course correction. Government regulation and bailouts only cover for these mistakes and don’t force companies to adjust to new realities. The only reform that should be looked at here is the relationship between cheap money from the Federal Reserve and bank holding companies like JP Morgan, as well as the implicit guarantee that government will use taxpayer money to permit bad business practices to continue.

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