It really is a sign of how complete a victory that the banks have won over the rest of us that Jamie Dimon has the nerve to complain about banking regulations. Even worse, he is egging on a effort by Republican bank-owned Congresscritters to roll weak bank capital rules back.
His position is pure, simple, unadulterated bank propaganda: what is good for banks is good for America, when the converse is true. Simon Johnson warned in his May 2009 article “The Quiet Coup” that the financial crisis had turned American into a banana republic with a few more zeros attached, a country in the hands of oligarchs, in this instance, the financiers. And we playing out the same script he saw again and again in emerging economies:
The government, in its race to stop the bleeding, will typically need to wipe out some of the national champions—now hemorrhaging cash—and usually restructure a banking system that’s gone badly out of balance. It will, in other words, need to squeeze at least some of its oligarchs.
Squeezing the oligarchs, though, is seldom the strategy of choice among emerging-market governments. Quite the contrary: at the outset of the crisis, the oligarchs are usually among the first to get extra help from the government, such as preferential access to foreign currency, or maybe a nice tax break, or—here’s a classic Kremlin bailout technique—the assumption of private debt obligations by the government. Under duress, generosity toward old friends takes many innovative forms. Meanwhile, needing to squeeze someone, most emerging-market governments look first to ordinary working folk—at least until the riots grow too large.
And if you doubt the idea that squeezing the bankers will be bad for the rest of us, pretty much everyone who has looked at this question who is not a bank-paid shill begs to differ. We’ve pointed multiple times to an estimate by Andrew Haldane, Executive Director of Financial Stability for the Bank of England that a mere 1/20th of the low end of the estimated fully-loaded costs of the crisis just past exceeds the market capitalization of the biggest global banks. They are destructive on such a massive scale that doing anything to rein them in would be progress. Similarly, the IMF warned against coddling banks in a study of 124 banking crises:
Existing empirical research has shown that providing assistance to banks and their borrowers can be counterproductive, resulting in increased losses to banks, which often abuse forbearance to take unproductive risks at government expense. The typical result of forbearance is a deeper hole in the net worth of banks, crippling tax burdens to finance bank bailouts, and even more severe credit supply contraction and economic decline than would have occurred in the absence of forbearance.
Cross-country analysis to date also shows that accommodative policy measures (such as substantial liquidity support, explicit government guarantee on financial institutions’ liabilities and forbearance from prudential regulations) tend to be fiscally costly and that these particular policies do not necessarily accelerate the speed of economic recovery.5 Of course, the caveat to these findings is that a counterfactual to the crisis resolution cannot be observed and therefore it is difficult to speculate how a crisis would unfold in absence of such policies. Better institutions are, however, uniformly positively associated with faster recovery.
Economists continue to affirm these same observations. For instance, from a short paper by Stijn Claessens and Ceyla Pazarbasioglu of the IMF, posted yesterday at VoxEU:
The comparisons between the global financial crisis and past episodes have been many, but this column argues that policymakers should look again, and closer. It says that without restructuring financial institutions’ balance sheets and their operations, as well as their assets, the economic recovery will suffer – and the seeds will be sown for the next crisis…..
Acknowledging the unique and global nature of the recent crisis and varying country circumstances, our analysis suggests that the diagnosis and repair of financial institutions and overall asset restructuring are much less advanced than they should be at this stage….Consequently, vulnerabilities in the global financial system remain considerable and continue to threaten the sustainability of the recovery.
This is polite bureaucrat-speak. Translation: “You blew it”.
So what does Jamie Dimon claim? We get hyperventilating, which makes perfect sense, since the facts are not on his side. From the Financial Times:
Jamie Dimon, chief executive of JPMorgan Chase, launched a broadside against financial regulation on Wednesday, warning that new capital rules could be “the nail in our coffin for big American banks”.
Regulators are negotiating international capital standards for the biggest banks but Mr Dimon said setting the new requirements too high, or allowing overseas banks to calculate their asset base differently, could disadvantage US banks and was already stifling economic growth.
“If you want to set it so high that no big bank ever goes bankrupt … I think that would greatly diminish growth,” he told a US Chamber of Commerce conference. Too large a disparity in capital requirements between Europe and the US would mean “you’re pretty much putting the nail in our coffin for big American banks,” he said.
Actually, Dimon is both exaggerating (the banks wouldn’t die but would morph and shrink, which would first and foremost hurt top executive pay) and misrepresenting (that shrinking the banks would be bad for the rest of us). And the idea that being nice to the banks by letting them run with too little capital helps growth is a flat out lie. Yes, before things blow up, the economy might run at a faster rate, just as athletes using performance-enhancing drugs do better too. But as Haldane showed, the PERMANENT growth losses of financial crises greatly exceed the benefits.
And as we’ve also stressed, we don’t need big banks, at least for traditional banking services. They are less efficient on a cost per dollar of asset basis (the overwhelming majority of studies say the efficiencies top out at $5 billion or below; reader Ishmael confirms that notion but says he can accept the idea that it might peak as high as $25 billion in assets).
The open and thorny question is what to do with the dealer operations, that is the capital markets functions of major financial firms. These do have strong economies of scale. The best solution may be to regulate them as utilities, strictly limiting their balance sheets to highly liquid assets (which was the profile of traditional investment banks) and severely restricting their role in OTC derivatives (which are used to a significant degree for regulatory arbitrage and accounting games, which are not socially productive uses).
Claessens and Pazarbasioglu recommend remedies that are the polar opposite of Dimon’s “do as little as possible” demands:
Establishing the long-term viability of the financial system requires recognising non-performing assets at financial institutions and a deeper operational restructuring of debts of enterprises and households. Regarding the persistent weaknesses in bank balance sheets, in-depth diagnoses still need to be conducted, including through strict and transparent stress tests. When the diagnoses call for credible recapitalisation plans or restructuring of liabilities, they should be carried out swiftly in ways that do not worsen sovereign debt burdens. Conditions in some countries require government interventions, including targeted programmes to alleviate debt overhangs in the household and commercial real-estate sectors. More broadly, asset restructuring needs to be driven by market forces, supported by tighter regulations –including in the areas of loan-loss classification, provisioning, and disclosure – and enhanced supervision.
In most countries, more effective resolution tools are required to preserve financial stability in an increasingly complex and interconnected global system.…
The policy mix applied in the recent crisis has greatly intensified moral hazard. ….Measures are needed to restore proper incentives and market discipline. Governments need to rethink how to reduce the threat that large financial institutions pose to systemic stability, including through reduced complexity, better capital structures, and, possibly, restrictions on their scope and activities.
The policy mix applied in the recent crisis is unlikely to be repeated in response to a future crisis. It would be too costly economically and too controversial politically.
The last observation, that the bailouts just past will not be repeated (or at least not to the same extent; the next wipeout is guaranteed to be bigger, central bankers will have little latitude to drop interest rates, and the political cost of rescues will be much higher) is something the banksters and their regulators simply do not grasp. As Michael Hirsh reported:
“Bottom line: Nobody on Wall Street believes that these big institutions are no longer too big to fail,” says Dan Senor, a New York City hedge-fund manager who doubles as an informal Republican advisor in Washington. “No one believes they would not be bailed out and backstopped in some way by the government. That’s just the reality.”
And the officialdom is enabling this view in a bizarre, ongoing display of cognitive dissonance, pretending that unworkable measures like the Dodd Frank special resolution authority are viable (see the testimony by Josh Rosner for details), yet also aggressively promoting policies that would increase costly bank welfare programs (the most appalling was a New York Fed paper recommending that all asset backed securities be government guaranteed. In the rest of the world people have a right to health care; instead, we seem to be working on a plan to guarantee debt slavery via heavily subsidized credit).
The only good news is that even the MSM is starting to report on how crazy and unsustainable this all is. The fact that a piece like “Tax the Super Rich now or face a revolution” has appeared on MarketWatch, even if it is an isolated sighting, is a sign that the images of unrest in the Middle East, Greece, and London (where an estimated 250,000 to 400,000 turned out to protest against the banks) may start to penetrate the defenses of a sheltered ruling class. And if not, they may learn that the “Après moi, le deluge’” school of thought didn’t do Louis XVI much good.