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Last
week's $2 billion (now likely much higher) trading loss at megabank JP Morgan
Chase sent the financial world into a frenzy. The bank's stock plunged more
than twenty percent, and regulators in Washington leaped at the opportunity to
call for stronger oversight of Wall Street. Many have called for the
resignation of JPM's CEO, Jamie "Panache" Dimon, from the New York
Fed's Board of Governors.
I
don't see what the hullabaloo is about.
Yes,
JPM's trading loss was large, but the bank will likely still turn a profit in
the second quarter. This will not cripple the company by any means. What's
more, had something like this happened at JPM's two ugly stepsisters - Bank of
America and Citi - it would probably not even make headlines.
JPM
remains a very well-managed bank. It will not be needing a taxpayer bailout
anytime soon. The company will absorb its own losses, the managers responsible
for the damage will resign, and business will eventually return to normal. This
is how a crisis should be done. The tumult in the media and on Wall Street is
unnecessary.
Moreover,
the response of Washington regulators reveals that the loss has had a good
effect - it is inspiring discussion about how to improve the financial
regulatory system. This is good - conservatism does not oppose regulation; it
opposes inappropriate or inefficient regulation. Good regulation is healthy for
the economy, as it mitigates damage in times of crisis.
As
far as I'm concerned, financial regulation has two aims:
1.
To protect depositors' money. When
you deposit money in a bank, you should - and do - have a guarantee that your
money is safe. The government has a duty to make sure banks' practices do not jeopardize
the money you're saving for college or retirement.
2.
To protect the economy from the failure of systemic
institutions. If the failure of an institution will have a major negative
effect on the country, it is necessary for the government to ensure that the
institution does not incur undue risk of collapse. However, under no
circumstances is it appropriate for the government to bail out a failing institution
with taxpayer money.
If
regulation of the financial sector does not pertain to one of these two goals,
it is bad regulation and is most likely antithetical to the free market. JP
Morgan is a systemic institution as well as a savings bank, so increased
oversight of its trading practices may be necessary to ensure that it does not
put depositors' money or the larger economy at risk. However, I am confident
that JPM will emerge from this setback stronger, an exemplar of how to properly
navigate a crisis.
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