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Is J.P. Morgan's James Glassman a double agent?


Last week's hearings before the Senate Subcommittee on Investigations "exposed an unnerving ignorance of fundamental principles of market economics by folks who have a hand in remapping rules of finance that will be with us for a while," writes James Glassman, a managing director and senior economist at J.P. Morgan Chase. Glassman then goes on to bash Michigan's economy for a while (because Carl Levin is from Michigan, and, ah, what's the point?) and declare "now that the financial reform debate is in the final innings, it's time for the grownups to step in."

Hoo boy. It's as if Glassman wants Congress to come down like a ton of bricks on his industry. Just look at the graph (pictured above) that Glassman decided to include in his presentation. You think that's going to make Michigan's delegation more receptive to J.P. Morgan Chase's interests? But putting aside the political consequences of Glassman's childish outburst, is it true? Is Congress beset by an "unnerving ignorance of fundamental principles of market economics?"

Sure it is. But so too is Wall Street. After all, it wasn't Congress's dumb investments or ignorance of basic economic principles that triggered the financial crisis. It was Wall Street's. In particular, its unnerving ignorance of tail risk, its massive exposure to counterparties who didn't have the money to pay off their debts, and its belief that market fundamentals (like the rent-to-price ratio) could be rendered obsolete utilizing quantitative trickery that few of them understood.

Like Glassman, I'm very skeptical of Congress's ability to succeed at a fine-tuned intervention into the financial sector. But unlike Glassman, I'm very skeptical of Wall Street's ability to keep its house in order, particularly when the worst thing that'll happen if they wreck the place is that they'll have to let someone else clean up their mess. At the bottom of my skepticism is the serious flaw present in both institutions: They're populated by humans. Just witness Glassman's inability to keep his temper under control, despite the great cost his company will pay for the outburst.

That's why I'm supportive of blunt interventions rather than delicate nudges. Sharp limits on the amount of leverage a firm can carry. Total transparency and clearing of derivatives for all financial firms, and almost all corporations (people underestimate how many corporations are juicing their profits by running what amount to hedge funds). Some form of a bank tax that simply makes the sector less wildly profitable.

As Glassman says, the fundamental principles of market economics are important. And one of those principles is that profits are an important driver of human behavior. Want less risk-taking on Wall Street? Don't muck around with clever regulations and regulatory powers. Make it less profitable.

By Ezra Klein  |  May 5, 2010; 9:15 AM ET
Categories:  Financial Regulation  
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Next: Chuck Grassley's odd accounting


It's a variant of "suicide by cop". Health insurers did it too, by announcing 50% rate hikes during the health reform debates.

Posted by: wiredog | May 5, 2010 9:22 AM | Report abuse

Of course the fundamental principles of market economics are important. Like that fact that central bank money dilution is going to invariably distort the price, investment and capital structure leading to an unsustainable boom followed by a painful bust. It will especially distort the capital structure of industries such as the auto industry (Michigan anyone?).

Friedrich Hayek won the Nobel Prize for that theory, the Austrian Business Cycle Theory, and Mr. Klein does his best to make sure that nobody ever hears of it.

Posted by: BobRoddis | May 5, 2010 9:32 AM | Report abuse

Glassman is, of course, the notorious author of "Dow 36,000." Clearly that's who I want lecturing people on their "unnerving ignorance of fundamental principles of market economics"!

The fact that Mr. Glassman is now JPMorgan's Chief Economist does not engender great confidence in the willingness of our leading financial institutions to avoid the next insane, catastrophic bubble.

The question, though, isn't "Have they learned nothing?" It's "Have WE learned nothing?"

Posted by: bcamarda2 | May 5, 2010 9:49 AM | Report abuse

"Some form of a bank tax that simply makes the sector less wildly profitable."

While I generally think blunt intervention would probably be better than too-clever-by-half micromanagement, I don't think a bank tax is the way to go. First of all, the wild profitability seems to be, in part, driven by a lack of transparency, an ability to leverage themselves to the hilt, and synthetic financial products that promise to let them make profits off of things that they do not own. Limit leverage rates and force transparency, you're halfway there on "wild profitability".

Secondly, a tax doesn't actually decrease gross profits. It decreases net profits. And it does that by inserting another interested party into the equation: the government. Who then has a direct motivation to discourage transparency and raise leverage rates and endorse synthetic financial instruments that nobody understands but everyone thinks are wildly profitable.

You think regulatory bodies weren't doing their job during the last bout of irrational exuberance, you just wait into 25% of bank profits are going to the government. Also, you think Goldman Sachs was too big to fail in 2008 and 2009? You just wait until 2016. "We are paying for healthcare and clean energy with this bank tax! Not only are they too big too fail, they are too big to regulate or force onto open exchanges!"

Maybe I'm just cynical.

Posted by: Kevin_Willis | May 5, 2010 9:55 AM | Report abuse

Glassman is an MD(Managing Director) and senior economist and JP Morgan - he is NOT their chief economist. Please fix this asap, as it makes the issue look bigger than it is (if he's in senior leadership it appears like JPM is encouraging him, when in reality they've already apologized).

Posted by: phantasypunk | May 5, 2010 9:55 AM | Report abuse

That's James K. Glassman. This one is James E. Glassman. Not that Jim E is any less the idiot: Texas employment is not a product of laissez faire genius, it is a function of energy prices. The son of an erstwhile big-oil executive, I well remember what happened to Houston when crude was under $12. It wasn't pretty.

Posted by: wcwhiner | May 5, 2010 9:56 AM | Report abuse

Oh - also to all the people trying to make a connection between DOW 36,000 and this guy - they're two different Glassmans (James K. and James E., to be correct). This is not to say that they're not both idiots.

Posted by: phantasypunk | May 5, 2010 9:57 AM | Report abuse

Glassman is correct in that there seems to be a rush to "do something" before thinking the process through. While Ezra points out that banks are becoming hedge funds in drag, nobody is talking about how hedge funds are encroaching on businesses historically done by banks - things like stock loan, underwriting, direct loans. Before we cut off Wall Street at the knees, lets think about what happens when Citadel is the new Citibank.

Posted by: sold2u | May 5, 2010 10:28 AM | Report abuse

"After all, it wasn't Congress's dumb investments or ignorance of basic economic principles that triggered the financial crisis."

Actually, it was. Housing market fueled by government sponsored entities buying low downpayment loans on inflated asset prices from unqualified borrowers backed by taxpayers. Fed Reserve add low interest rate fuel. Idiots on Wall Street magnify crisis by reselling the debt and derivatives based on it to people borrowing more money.

Too much consumer credit/debt, too much government debt, too much corporate debt. Complete ignorance of risk by people demanding 7% returns because pension plans need that to stay solvent. As Nassim Taleb has highlighted recently- the history of the world, going back to Babylonian times, through the Mediterranean religions, even grandma that lived through 1929 is full of counsel against debt. Keynesian econ is no excuse to ignore the historical record... too much debt eventually blows up.

I don't know much about Carl Levin, but his performance at the GS hearing made him look like completely ignorant of the concept of a market maker. I hope he watched the Blankfein interview on Charlie Rose and got a better understanding of what's going on. His approach to the hearing made him appear as if he was unwilling to even try to understand what was going on.

"Some form of a bank tax that simply makes the sector less wildly profitable."
More competition would also do that. Most people in the industry are more upset that GS has cartel pricing power and special arrangements as a primary dealer that block other companies from competing with them.

If you simply take the government provided credit away from these guys, they can't bring down too much else when they blow up.

Posted by: staticvars | May 5, 2010 10:36 AM | Report abuse

First we had JPM's CEO, Jamie Dimon, whining repeatedly about people being "mean" to bankers. Now we have the "wisdom" of Mr. Glassman calling for adults to take charge of the debate over financial regulation.

Honestly, is there anyone at JP Morgan who isn't completely tone-deaf? These guys are dragging down the image of every bank and financial institution in the country. Can't the ABA or Financial Roundtable get a restraining order to make them stop talking?

Posted by: DACarlson | May 5, 2010 11:38 AM | Report abuse

"... the serious flaw present in both institutions: They're populated by humans."

You could add to that: humans with enormous tendencies toward hubris. I think that the method(s) by which people are selected to participate and by which they succeed could use some attention.

Many of the statements by these individuals indicate that they feel that they have all the answers, that their status means that everyone should be following them. We need more listeners and learners and less egomaniacs.

Personally, I'd like to see Esther Duflo's approach applied more widely. Possibly to extended to the point where the goals are set by legislatures and the methods and policies are determined through the scientific method. Perhaps this would lead to more explicit statements of true intent by the politicians and better methods and policies through research and peer review.

Of course everything would be vastly improved just by tossing out the Senate or at minimum the filibuster.

Posted by: bcbulger | May 5, 2010 11:50 AM | Report abuse

TED talk by Esther Duflo:

Posted by: bcbulger | May 5, 2010 11:51 AM | Report abuse

My mistake and my apology for getting my Glassmans confused. Thanks for correcting me.

Posted by: bcamarda2 | May 5, 2010 2:00 PM | Report abuse

Thank you, staticvars. Ezra Klein's latest temper tantrum is as bad as Glassman's. But, at least, the substance of Glassman's comments are helpful. Whatever your view of Wall Street, how can Congress reform what it has shown it is clueless about? Heard of the Law of Unintended Consequences?

BTW, if anyone's interested in a real explanation of the GS trade:

Posted by: bjwl43 | May 5, 2010 6:47 PM | Report abuse

Mr. Glassman hardly deserves the abuse heaped on him here. His analytical prowess and forecasting abilities are the envy of corporate hack economists the world over.

After all, didn't he call the real estate market collapse at the same time John Paulson and Goldman were putting Abacus together saying, in a speech at Bard College on April 20, 2007, "There is always a risk of recession, just like there is always a risk of a meteor striking the earth.” The housing slide is “a mile deep and an inch wide. It is hurting home builders, but few others."

Or take this bold contrarian view about the future course of the economy Glassman offered Bloomberg last August. "'Whenever
we have plunged off a cliff and fallen into a deep hole in the past, for a while the economy has a tendency to bounce back very quickly,' said Glassman... Glassman and his [JP Morgan] colleagues this month said forecasts of 3 percent to 4 percent growth in coming quarters may be too low given 'pent-up' consumer demand."

The man has a record to be proud of.

Posted by: Philip12 | May 5, 2010 10:12 PM | Report abuse

I hope all of you will follow bjwl43's advice and read the short article to which he/she has kindly provided a link:

Bj... praises this article as a "real explanation of the GS trade" which is remarkable considering it is only 350 words long.

Even more remarkable, most of the article doesn't attempt to explain Abacus at all. In fact, there are only two sentences that provide any "explanation" of Abacus whatsoever. Here it is:

"Darrell Duffie, a professor of finance at the Stanford Graduate School of Business and an expert on complex derivatives, explained the intricacies of a deal known as Abacus 2007 AC-1, a $2 billion securities package at the heart of the [SEC] complaint, and concluded that Goldman's economic incentives for the performance of the deal were the same as those of the Abacus investors. Like those investors, Goldman ended up losing money, a net loss of $75 million after fees."

That's it. The definitive explanation of Abacus. Almost short enough to tweet!

Posted by: Philip12 | May 5, 2010 10:37 PM | Report abuse

James K. Glassman is not only the co-author of "Dow 36,000" (a book I would urge you to read before you criticize) but also the author of "The Secret Code of the Superior Investor" and the upcoming book, "The Comeback," which makes some surprising recommendations of investing strategies. Read it! He also wrote a Washington Post column for 11 years. He's a big fan of James E. Glassman, but no relation. All the best,
James K. Glassman

Posted by: jkglassman | May 9, 2010 8:22 AM | Report abuse

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