Unsurprisingly, President Obama and others have used the recent $2 billion loss by JPMorgan Chase as a call for more regulation. Obviously, our existing regulations have worked so well that more can only be better!
What the president and his allies miss is that recent events at JPMorgan illustrate how the system should — and does — work.
Let's compare two cases. In September 2003, when warned of problems at Freddie Mac and Fannie Mae, then-House Financial Services Chair Barney Frank stated, "I want to roll the dice a little bit more in this situation." Well, Chairman Frank did indeed "roll the dice," and now the American taxpayer is almost $200 billion poorer.
JPMorgan rolled the dice, betting that the U.S. economy would improve — essentially a bet on Obama's economic agenda. That bet went south. JPMorgan lost $2 billion, one hundredth of the losses so far on Fannie Mae and Freddie Mac.
But the losses at JPMorgan were borne not by the American taxpayer, but by JPMorgan. The losses also appear to have been offset by gains so that in the last quarter JPMorgan still turned a profit.
This is the way the system should work. Those who take the risk, take the loss (or gain). It is a far better alignment of incentives than allowing Washington to gamble trillions, leaving someone else holding the bag.
The losses at JPMorgan have also resulted in the quick dismissal of the responsible employees. Show me the list of regulators who lost their jobs, despite the massive regulatory failures that occurred before and during the crisis. In fact, some of the most incompetent, such as the previous president of the New York Federal Reserve Bank, actually got promotions.
Talk about twisted incentives. In the private sector, you gamble, you take the loss, and you may lose your job and your career. In the public sector, you gamble and the taxpayer takes the hit, and you might even get a promotion out of it.
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