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Jamie Dimon May Come Out Swinging Tomorrow, But His Fast Ball Isn’t What It Was

“Which Jamie Dimon will appear before the Senate Banking Committee in Washington on Wednesday?” asks Reuters BreakingViews columnist Rob Cox in a Slate piece.  “The self-effacing JPMorgan boss offering apologies for his bank losing at least $2 billion on bum trades?,” he asks? “Or the combative JPMorgan leader who just a year ago publicly challenged the chairman of the Federal Reserve over regulation?”

Cox recommends the latter, which is why the piece is titled “Jamie Dimon Should Come Out Swinging in the Senate.”  He worries that “a mealy submission from Dimon may help effectively nationalize the American banking industry for good.”  He asks us to “[c]onsider the implicit message the senators who called Dimon before them are sending: that banks must answer to the nation for any losses they incur – and that watchdogs and regulations should somehow be able to prevent them.”

I did. This required me to consider his claim that a mealy submission from Dimon may help effectively nationalize the American banking industry for good (meaning “permanently,” not “beneficially”).  He’s saying that the reinstatement of the Glass-Steagall statute or a meaningful implementation of the Volker Rule—separating investment banking from retail banking and barring federally-insured banks from speculating with depositors’ money (which is what JPMorgan did)—would amount to nationalization of the American banking industry.  And he’s saying that a law capping the size of federally-insured banks would do that. 

After all, the reason for the Senate Banking Committee hearing tomorrow is that Congress is considering enacting laws that would do those very things—laws that would return the banking industry to some semblance of what it was for the period between 1933 and the 1990s, before bank-merger mania and the repeal of the relevant parts of the Glass-Steagall Act so changed the nature of the American banking industry.  You know, to the way banks were during that long postwar period of economic stagnation caused by the nationalized banking system we had back then, until de-nationalization returned the industry to the free-enterprise system.  In recognition of the fall of Communism, I guess.

I also considered the horrors of a return to that Commie banking system of the postwar era, when watchdogs and regulations somehow were, in fact, able to prevent most large banks from failing and their depositors from needing that FDIC insurance.  I shuttered.  No, sir!  Wouldn’t want to see that!

An effective Volcker Rule and the reenactment of Glass-Steagall might,of course, cause banks to start using those deposits to lend money to businesses, since credit-default-swap speculation no longer would be an option for them.  But we wouldn’t want banks to start acting like banks rather than hedge funds again, would we?

Dimon may come out swinging, but I expect that it will be the Democratic senators who will hit it out of the park. Dimon’s fast ball isn’t what it was.

Elizabeth Warren campaigns in MA

Elizabeth Warren is running for the US Senate in Mass. and came by Casey’s Diner Monday at lunchtime, a stop among many.   Eventually the campaign will heat up as a lot of money is being raised, and the summer ends.

Ezra Klein of the Washington Post interviewed Elizabeth Warren this Monday as well. Here is part of the transcript with questions and answers regarding JP Morgan and Jamie Dimon from the wonky economic policy and regulatory angle:

EK: That gets us to the Volcker rule, which is what would keep banks that get that guarantee from gambling with customer money and a federal backstop. But at this point, I don’t think very many people — even people who follow this stuff quite closely — have a very specific sense of what the difference between a good and bad Volcker rule is. So how do you think about that?

EW: I’m going to reframe it slightly: Who profits from the complexity of the Volcker rule? It’s the largest financial institutions. No financial institutions want a simple Volcker rule. They want layers and layers of complexity because it’s in complexity that there are loopholes. That’s where it’s possible to back up regulators who are not quite certain about the ground they stand on. And it’s a larger problem with our regulatory structure: Complexity favors those who can hire armies of lobbyists and lawyers. The big push I made at the Consumer Financial Protection Bureau was simple rules. Simple mortgage documents. Simple credit card agreements. Because complexity creates too many opportunities for an army of lawyers to turn the rules upside down.

 EK: I agree that complexity is where lobbyists and lawyers work their dark magic. But when I talk to people in the industry about this, they say that simple rules sound great, but they’re not really possible. It’s hard to distinguish a hedge from a bet, or a speculative trade from a legitimate one. The world is complex, and that’s why regulators and politicians who don’t like Wall Street and don’t like being browbeaten by lobbyists end up allowing complex rules, too.

EW: Here’s another way to look at what you just described: That’s the strongest argument for a modern Glass-Steagall. Glass-Steagall said in effect that hedge funds should be separated from commercial banking. If a big institution wants to go out and play in the market, that’s fine. But it doesn’t get the backup of the federal government. If it’s too complicated to implement the Volcker rule, do you say we give up and let the largest financial institutions do what they want? Or do you say maybe that’s the reason we need a modern Glass-Steagall?

EK: What about breaking up the big banks?

EW: You’re approaching risk from two different directions. One is the risk of the activity. That’s the Volcker rule. The other direction is to say risk is an assumption of size. Community banks shouldn’t have to deal with complex regulatory oversight, but the largest institutions should be subject to far more aggressive oversight and have to pay more for the protections they receive from the American taxpayer. Then shareholders may decide to invest in institutions that are not so large.

Moyers and Volcker interview

Bill Moyers points us back to banks and fiduciary responsibilities:

“You shouldn’t run a financial system on the expectation of government support. We’re supposed to be a free enterprise system,” Volcker tells Moyers. “The problem of course is once they get rescued, does that lead to the conclusion they’ll get rescued in the future?”

From Bill Moyers and Company, an interview with Paul Volcker on the Volcker rule in Dodd-Frank, transcript included.