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.
May 5, 2010; 9:15 AM ET
Categories: Financial Regulation
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