Sunday, October 27, 2013

Meanwhile, back at the financial industry crisis of greed...

One of my favorite financial writers is Gretchen Morgenson.  She writes a weekly column on the industry for the New York Times.  Today she writes about the $13 billion fine the Justice Department is charging JP Morgan Chase, run by Jaimie Dimon.  To me, the fine is nice, and a little bit of punishment, but I don't think it does much of anything to change the flawed incentive system that led to a crisis of greed and corruption that did so much damage to the U.S. and world economies, from which we are all still suffering (except for the super wealthy, of course).

I guess there are those bemoaning that the fines were too harsh, but as Ms. Morgenson writes:
"Nobody made them underwrite toxic loans, sell them to unwitting investors and misuse beleaguered borrowers."  

Personally, I would still like to see some jail time for the leaders of these pirate institutions.  But, oh well.

She points out the obvious, that the financial giants have gotten bigger, still have an intrinsic government guarantee of being bailed out for their sins that go awry, and have gained political influence as as result of the crisis that they created in 2008.  I would add that in many ways, our democracy has been supplanted by an oligarchy led by the financial sharks fresh from their last kills.

She reminds us that the financial institutions used to be controlled by the Glass-Steagall Act, which separated commercial and investment banking. And although it can be claimed that such a separation might not have prevented the 2008 financial meltdown, there was one very toxic effect of the repeal of that law - the institutions themselves grew exponentially in size and power and political influence.  They became impregnable.  They took over the government.  For themselves.  Not for the benefit of the economy. For their own pocketbooks. 

But isn't that the magic of capitalism?  that when each of us operates in our own self interest the economy is guided by an invisible hand that ends up benefiting the economy itself and thus, in the long run, benefits the people in the economy?  Well, yes, unless some become too powerful and disrupt the competition that is the heart of capitalism.  Witness Teddy Roosevelt's trust busting of over a hundred years ago, which was needed to allow the proper functioning of capitalism.

She cites a professor of entrepreneurship and finance at the University of Chicago:

""When all the financial firms are the same and all large, then they are going to have the same interests and lobby in the same direction" Zingales said.  If they have competing interests because they cannot all be in the same businesses, their lobbying power shrinks."

Zingales' solution:

"First, we must force these institutions to recapitalize more" he said.  "But we must also find a more automatic trigger to force recapitalizations along the way."

The automatic trigger empowers the regulators to take over the institutions if they don't recapitalize.  That should get their attention.

Finally, Zingales recommends changing antitrust rules to include taking into account the added political influence proposed mergers would have in addition to the effect the mergers would have on competition and economies of scale.  

He concludes:

"These companies become so important politically to the state or country that it is hard to resist transforming their interests into the policy of the country."

Unfortunately, it is not much of a stretch of the imagination to see that the policies of our country have been transformed into the interests of the financial giants for quite some time.  Which would be fine, if the financial industry were focused on providing capital for capitalism, real capitalism, creating businesses and industries and jobs and economic growth.  But, the financial industry seems to have been transformed into a zero sum game where those on the inside make fortunes and those on the outside just hope our portfolios and pensions aren't destroyed by the recklessness and greed of the sharks at the top.