Not for the first time, Elizabeth Warren has spoken a simple truth, one that ought to be heeded: Jamie Dimon must surrender his seat on the board of the Federal Reserve Bank of New York.
The seat in question is part of a body that has god-like influence over the most crucial questions governing high finance. Like, for example, whether colossal institutions such as Dimon's ought to be spared from collapse by taxpayer largess when bad things happen. And as Dimon's bank has just helpfully reminded us, courtesy of its $2 billion-plus in losses on a bum trade, bad things happen all the time, especially when the financial lobby manages to keep fighting off any semblance of sensible regulation.
Yes, you heard right: The chief executive of JP Morgan Chase -- the largest bank in the land, and the exemplar of a 'too big to fail' institution -- is allowed to sit at the table with the people tasked with deciding when and how much of other people's money gets earmarked for his rescue. This is not the fox guarding the hen house; this is the fox guarding the hen house while selling synthetic derivatives whose value increases with every hen he gobbles up, and who burns down the hen house so he can collect on his fire insurance policy, and then gets the government to build him a new hen house at taxpayer expense. And then, after that, he still gets to guard the new hen house.
In what other industry would this sort of arrangement be tolerated? Would we let, say, the oil and gas industry dominate the federal regulatory body that sets workplace safety and environmental standards governing offshore drilling? Well, yes, as it happens, we would. But that did not end well. Moreover, after the brazen recklessness of BP and it contractors, who turned the Gulf of Mexico into an enduring laboratory for the study of sea life plus oil, we finally got a sorely needed reorganization of the regulatory bodies. Surely, the 2008 financial crisis qualifies as the financial equivalent of the Deepwater Horizon spill. Yet here we are, more than three years later, living with the same rules that brought us a global calamity. Which is to say, essentially no rules.
One of the many ways in which the financial lobby has successfuly protected itself against the party-killing prospect of reasonable government oversight is by arguing that modern-day finance is so complicated that no one small-minded enough to work for the government can possibly understand it. We need to rely on the good will of the geniuses capable of turning simple home mortgage into the raw materials for financial instruments more complex than General Electric's tax returns. Only these people have what it takes to be entrusted with the proper maintenance of the broader financial system. Moreover, those running financial institutions can be counted on to do the right thing to limit systemic risk and address whatever trouble might arise given their own direct interest in self-preservation.
This has always been a silly idea, the sort of notion that anyone lacking a fourth home could presumably see through in an instant. Yet it has had real staying power in the regulatory arena. Way back in 1998, when the hedge fund Long Term Capital Management nearly collapsed in part because of bad bets on derivatives, the New York Fed convened a room full of private bankers to settle the crisis. They emerged with pledges to kick in $3.6 billion in private funds to bail out the fund and they all declared victory.
Washington was then engaged in considering new rules for derivatives. Then as now, reasonable people pointed to Long Term Capital Management's near-implosion as proof that continuing to operate free of regulations was folly. But Fed Chairman Alan Greenspan, living in thrall to the idea that unregulated markets are a veritable fountain of riches, pointed to the same episode as proof of the opposite: You could count on the wisdom and decency of Wall Street's masters to do right in a pinch.
A few pinches later, Jamie Dimon has become the leading voice in favor of letting Wall Street do essentially whatever the hell it wants while ensuring that taxpayers and working stiffs must forever step in and pay, should anything go awry. He has angrily denounced those who call for financial regulation as ingrates who fail to factor in all the great things that 'too big to fail' institutions do for society. (Like, say, generating fresh acting opportunities for bald, middle-aged actors who look like Hank Paulson.) He has lampooned as unsophisticated those who suggest it's maybe not great that we have been firing school teachers and dismantling an already meager social safety net so we can keep the world safe for Jamie Dimon and the traders in his employ.
But now Dimon is sorry, really deeply sorry, for the mess he has made. "We know we were sloppy," he told NBC over the weekend. "We know we were stupid. We know there was bad judgment." He pledged that his company would "fix it, learn from it, and be a better company when it's done."
That's a nice thought, but the real question is what will the rest of us learn from this? The ever-sensible consumer advocate Elizabeth Warren has an answer to that. She hopes we will learn that maybe it's not a great idea to entrust the regulation of the financial system to the people who make enormous amounts of money running it like a casino and then running to the taxpayer for cash when their bads go bet.
Here's hoping that this time is different and that lesson sticks.
UPDATE: An earlier version of this post incorrectly asserted that Alan Greenspan convened private bankers to address the crisis at Long Term Capital Management. The meeting was convened by William J. McDonough, then president of the Federal Reserve Bank of New York.
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