We’ve known for ages that Bank of America is not well run and that Citigroup has long been a recipe for disaster. But JP Morgan Chase was supposed to be different. Largely because Jamie Dimon, with his legendary attention to detail and concern about quantifying the downside, would ensure that this was not a mess that would befall this banking behemoth. In fact, Dimon used his own bank as justification for gutting what little financial re-regulation has hitherto taken place, and his team of lobbyists has done much to eviscerate any meaningful provision in the Dodd-Frank legislation.Marshall puts forth proposals for changing institutional rules for banking similar to Warren Mosler's.
Well, with the announcement of a $2 billion trading loss, it’s clear that all of the banks are the same: they are like children playing with Semtex and they need to be regulated. It’s time to embrace a narrow banking model. The hard lesson of banking history is that the liability side of banking is not the place for market discipline. Therefore, with banks funded without limit by government insured deposits and loans from the central bank, discipline is entirely on the asset side. This includes being limited to assets deemed ‘legal’ by the regulators and minimum capital requirements also set by the regulators. In other words, prevent the banks from doing certain things, rather than create responses (eg. higher capital buffers) to deal with the pre-existing problem.
So here’s some concrete ideas:
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JP Morgan Chase shows that all of the banks need more regulating
by Marshall Auerback
(h/t Kevin Fathi via email)