Ezra Klein on Self-Regulation

On Saturday, at 9:17am, Henry Blodget, the editor of Business Insider, asked the question that was on everyone’s mind: “So, when Is JP Morgan going to fire the incompetent fools who just lost $2 billion and trashed the firm’s reputation?”

The answer, according to the Wall Street Journal, is…soon. The paper reports that the botched trade is “likely to result this week in the departure of three of the highest ranking executives with direct ties to the investments.”

Over at Seeking Alpha, Gene Kirsch tried to put Hedgegate into a broader context. “JPMorgan losses are reported to be actually $800 million in Q2 with the potential for legal and other losses up to $4.2 billion over a longer period of time, possibly exceeding one year,” he wrote. “The banking unit of JPMorgan Chase alone made $12.4 billion last year. The holding company has over $2.26 trillion in assets and is the largest U.S. bank and 8th largest in the world. The holding company made $29.9 billion in operating income and just over $20 billion in net income for 2011. So, this initial loss of $800M represents approximately 4% of its total net profit for all of 2011, less than 2.7% of its operating income.”

The firm, in other words, can manage it. Though as Brad DeLong was quick to point out, tallying the direct losses misses the episode’s larger impact on the firm’s value. “The revelation that JPMC did not have control over its derivatives book–even though accompanied by promises of multiple firings and deep reforms–destroyed 1/7 of JPMCs franchise value.” Turns out the market doesn’t much like it when what’s reputed to be the safest bank on Wall Street turns out to be incompetent.

Jared Bernstein draws out the larger lesson nicely, and so I’ll quote him at some length. “The fundamental truth here is the one known since Adam (Smith, that is) and amplified by the great financial economist Hy Minsky: humans underprice risk. Their proclivity to do so increases as the business cycle progresses and confidence takes over (remember, JP’s bet was unwound by the fact that the economy wasn’t as strong as they thought). The advent of a global derivatives market with notional trades in the trillions greatly amplifies the risks.”

“The fact that humans like Jamie Dimon—he who presided over JP’s self-proclaimed ‘fortress balance sheet’—he who inveighed against financial reform as imposing unnecessary oversight on such skilled risk managers as he and his staff—fall prey to this fundamental truth only underscores the lesson of this episode in financial hubris.”

“And that is this: financial markets are inherently unstable. They will neither self-correct nor self-regulate. Their instability poses a threat to markets and economies and people across the globe. Therefore, they need to be regulated. That’s not to say that anyone knows the best way to do this yet in order to balance the necessity of oversight with the dynamics of the markets. We don’t know where to set the speed limits. It must be an iterative process. But we do know they need to be set, and JP’s loss should be taken as a warning that our tendency is to set them too low.”

BuzzFlash: Twelve Questions for Mitt Romney That Journalists Might Not Ask

STEVEN JONAS for BUZZFLASH AT TRUTHOUT

Well, Governor Romney seems well on his way to garnering the GOP nomination for the Presidency. It is hard to see how his quest could be derailed at this point, even by the revelation in the Washington Post that he bullied prep school classmates that he thought were gay. He acknowledged that he was involved in such “high jinks and pranks,” but he had “no idea that this person might have been gay.” (Sort of like Clinton and marijuana and “I didn’t inhale.” But that is another matter.) So, in this space we ask Governor Romney questions that might not otherwise be asked by journalists:

1. You have had significant experience in running a company that made its money (and still does, and you still benefit from its profitability) by closing down, downsizing, and exporting jobs from various companies. You are proud of that experience, in fact, because you made a lot of money doing it. How does such experience qualify you to “rescue an economy,” an economy that has been trashed by corporate closures, downsizing, and the export of jobs?

2. Treason is generally defined as engaging in one or more acts designed to overthrow the sovereign power of one’s own nation. It is also defined as consorting with the enemy in wartime (such as Prescott Bush’s bank did with Germany, until February, 1942, when it was forced to stop by President Roosevelt under the threat of criminal prosecution). In this country, it is a crime that carries the death penalty. Of course Ann Coulter, in her 2003 book Treason, had another definition: In general terms, anyone who did not support US policy during the whole of the Cold War (generally “liberals”) was a traitor. What is your understanding of the term? Whatever it is, do you agree with the woman who recently asked you if you thought that President Obama should be tried for treason?

3. You have said that one plank of your platform will be to propose the enactment of a Constitutional Amendment banning monogamous marriage equality. Presumably your position on this matter is based on statements about homosexual sexual relations in both the standard Christian Bible and the Book of Mormon. In fact, it appears that all of the organizations that oppose marriage equality for same-sex couples base their positions on various interpretations of Biblical passages. Your church was the major mover behind the campaign in California to pass “Proposition 8,” which bans marriage equity. In fact, your PAC was a funder of that campaign, although it tried to keep that fact quiet at the time. Is it thus safe to assume that you are against the principle of separation of church and state?

4. Since you hold to the definition of marriage as “between one man and one woman,” do you believe that the “fundamentalist,” polygamist Mormons living in the far rural reaches of Utah, and several neighboring states, should be prosecuted and that the institution of polygamy should be shut down once and for all?

5. You supported the passage of the so-called “Personhood Amendment,” proposed to the voters of Mississippi (and defeated fairly soundly by them). It holds that life begins at the time of fertilization. Will a plank to make some form of the “Personhood Amendment” a part of the Federal Constitution be part of your platform?

6. One of your recent endorsers, former Sen. Rick Santorum, has referred to the science behind our understanding of global warming and its threat to humanity and many of the Earth’s species as “punk science.” Do you agree with that statement?

7. Sen. Santorum has also compared homosexual intercourse to “bestiality,” and would outlaw it if he could. What is your take on that position?

8. Sen. Santorum has also said the President John F. Kennedy’s famous speech on the separation of church and state makes him “want to vomit.” Do you too need to take Dramamine before looking at the text of that speech?

9. Another one of your recent endorsers, former House Speaker Newt Gingrich, has said, among other things, “I am convinced that if we do not decisively win the struggle over the nature of America, by the time [my grandchildren] are my age they will be in a secular atheist country, potentially one dominated by radical Islamists.” What is your take on that statement?

10. Mr. Gingrich has also proposed that “drug smugglers” (however one might define that term) should be executed. Where do you stand on that statement and on the Drug War in general?

11. Yet another endorser of your candidacy is Gov. Rick Perry of Texas, who is also well-known in his state as a lay preacher. Last year he issued an official proclamation for a statewide “Days of Prayer for Rain” (three of them, which happened to go unanswered). Do you believe in the power of prayer to bring about such natural occurrences as rain? Did you ever try something like it when you were Governor of Massachusetts?

12. Finally, by far the largest single item in the Federal budget is military spending. If the primary problem facing the nation is the Federal deficit, would you propose to cut military spending or would you increase military spending, while cutting taxes further?