16 May 2012

President Obama, The View, and the False Notion of Too Big To Fail

If there is one thing Barack Obama has proven throughout the first term of his presidency besides his expert use of grandiose, simplistic rhetoric, it is his ineptness at understanding economics.  Last year, the President hilariouslyblamed automatic teller machines and kiosks for unemployment.  Because politics is defined by reactionary and short term consideration, Obama doesn’t see the additional employment and capital surpluses that result by eliminating labor costs.
Such Luddite-esque thinking often provides all the more justification for government interference in the marketplace to try and equalize outcomes.  This view is paired with the perception that rather than society giving legitimacy to the state first, the state and its enforcers are destined to guide society.  Under the pretenses of promoting the public good, central planners see failure not as a necessary process of the market but an opportunity to usurp more authority.  Ludwig von Mises accurately recognized the inevitable goal of economic regulation decades ago:
Interventionism cannot be considered as an economic system destined to stay. It is a method for the transformation of capitalism into socialism by a series of successive steps.

Nowhere is this more prevalent than in today’s financial sector.  The recent $2 billion trading loss by Wall Street giant JP Morgan has given more ammo to the crowd that wishes Washington to have more of a say over the operation of the big banks.  Obama, ever the politician, has taken the loss as an opportunity to tout the merits of banking regulation.  In an interview on the daytime talk show The View, the popular ladies get his thoughts on Jamie Dimon’s big flub.  From McClatchy:
WHOOPI GOLDBERG: So now I’m wondering because I watched this JP Morgan Chase thing just go down. I’m wondering (A) what do you think happened and (B) sir what are you going to do about it because this has to be the last straw.
PRESIDENT BARACK OBAMA: Well look, first of all, JP Morgan is one of the best managed banks there is. Jamie Dimon the head of it is one of the smartest bankers we got and they still lost $2 billion dollars and counting precisely because they were making bets in these derivative markets. We don’t know all the details yet. It’s going to be investigated, but this is why we passed Wall Street reform. The whole point was, even if you’re smart, you can make mistakes and since these banks are insured backed up by taxpayers, we don’t want you taking risks where eventually we might end up having to bail you out again, because we’ve done that, been there, didn’t like it
BARBARA WALTERS:  Specifically, though, Mr. President, you have all of these things in place, some working, some not.  Are you — is the federal government going to do anything more so that this doesn’t happen?
The very fact that one of the ladies of The View asked Obama “what are you going to do about it” is revealing of the type of mindset they have and their lack of knowledge on all things economical.  Like many Hollywood stars that drool over the awesome power of Washington, the ladies of The View made a fortune in entertainment.  That is their personalities draw in viewers.  Watchers of The View have a myriad of other choices of television shows to watch but, for whatever reason, find that catty chatter of Joy Behar and Whoopi Goldberg appealing.  The ladies of The View have success in the market by selling their respective talents.  There is no coercion involved.  There is no expectation on the part of the American people that the federal government would step in to save the show should it lose ratings and go belly up.
This is how capitalism is supposed to work.  Private business prospers by satisfying consumers.  Success is never guaranteed therefore the threat of failure is ever present.  Shareholders know this.  Employees know this.  Management knows this.  Each takes the risk of dedicating their time and money to the venture in order to garner a return.  The danger is that customer preference can change in an instant.  What used to be a steady cash flow can dry up almost immediately.
And this happens everyday as businesses go under, shed jobs, and sell off assets in fire sales to the highest bidder.  These freed up resources are then used by entrepreneurs looking to thrive in the same market.
In a true free market the idea of a government bailout is counter intuitive.  It assumes that companies that go into bankruptcy quite literally disappear.  That the newly laid off employees end up begging in the streets never to work again and the previously employed assets rust away into nothingness.  But the human condition is one of constant change.  There is always demand to be met and wants to be satisfied.  Adjustments happen and the market process continues as before.  What business failure really entails is that it sends a signal that whatever practices were being engaged in before were not satisfactory to consumers or profitable.  It tells the businessman and shareholders in charge to adapt to shifting circumstances or close up shop.
When Goldberg asks “what are you going to do about this,” it’s is clear that the notion of “too big to fail” is still a consideration years after the financial crisis.  But there is one reason why large financial institutions such as JP Morgan are still considered TBTF.  Rather than a competitive marketplace, Wall Street has suctioned its influential and cash-rich tentacles to Leviathan.  It’s no secret there exists a revolving door between the Street and Washington, namely through the regulatory complex.  Banking executives get high-level jobs overseeing the banks they used to run, learn the loopholes to bypass whatever arbitrary red tape was constructed to give voters the sense that Uncle Sam is looking out for them, and then cash out by going back to manage another large financial institution.  This incestual relationship was cemented almost a century ago with the formation of the Federal Reserve which was a product of scheming bankers such as John Pierpont Morgan to ensure themselves infinite liquidity should they engage in far too risky business.  The banks now act as a middleman between the federal government and the printing press.  Jamie Dimoneven sits on the board of the New York Fed which is supposed to act as the Street’s top regulator.
And therein lies the root cause of Wall Street’s dicey business model.  In a recent New York Times editorial, economist and big government worshipper Paul Krugman uses the JP Morgan trading loss to emphasize the necessity of banking regulation.  He writes:
Just to be clear, businessmen are human — although the lords of finance have a tendency to forget that — and they make money-losing mistakes all the time. That in itself is no reason for the government to get involved. But banks are special, because the risks they take are borne, in large part, by taxpayers and the economy as a whole.
And after being asked what he would “do” in regards to JP Morgan’s $2 billion loss on The View, Obama responded:
“This is the best, or one of the best-managed banks. You could have a bank that isn’t as strong, isn’t as profitable making those same bets and we might have had to step in.  That’s exactly why Wall Street reform’s so important.”
Does it ever cross the President’s mind that perhaps the big banks take risks precisely because he stands ready to throw Joe Taxpayer’s hard earned money at their mistakes?  Right on national television, Obama affirmed what every Wall Street banker has been conditioned to; that should things get too hairy and big losses are imminent, a government bailout awaits.  This was the real purpose behind the Federal Reserve’s role as “lender of last resort.”  It took away the prudence necessary with the prospect of failure and transferred the losses into the form of devalued currency that all dollar holders must inevitably suffer from.  The end result was industry cartelization as existing banks are now protected from competition by smaller, more flexible ones.
The same goes with the Federal Deposit Insurance Corporation that puts taxpayers on the hook for $250,000 of demand deposits for each depositor in thousands of banking institutions.  With some TARP funds still outstanding and dubious accounting on part of the U.S. Treasury showing a profit for taxpayers, there is hardly a question if Washington will come to the rescue should another financial crisis wreck the balance sheets of supposed “too big to fail” banks.
As Fox Business Network Senior Correspondent Charles Gasparino points out,
But if JPMorgan’s loss had been truly life-threatening, no one in Washington would’ve let it fall into bankruptcy.
Dimon has stated publicly he’s against “too big to fail.” If JP fell apart, he says, the government should just put it out of business. Problem is, the ripple effects in the global markets would be huge — not to mention JPMorgan’s $1 trillion-plus in federally insured (that is, taxpayer-insured) customer deposits.
Just as “common ownership” incentivizes maximum use with minimum upkeep, government guarantees against failure throw the practice of risk management right out the window.  Why hold back on the excesses of high-risk trading when you are protected from insolvency?
From the 2008 financial crisis to Bernie Madoff, federal regulators have consistency proven too incompetent or too in-the-pocket to actually catch big disasters before they happen.  Their interests, like all government employees, are politically based.  State bureaucracies seek more funding no matter performance because their success is impossible to determine without having to account for profit.  There is never an objective way to determine if the public sector uses its resources effectively.
The news of JP Morgan’s loss has reignited the discussion over whether the financial sector is regulated enough.  The answer is that regulation and the moral hazard-ridden business environment it produces is the sole reason why a bank’s loss is a hot topic of discussion to begin with.  Without the Fed, the FDIC, and the government’s nasty history of bailing out its top campaign contributors, JP Morgan would be just another bank beholden to market forces.  Instead it, along with most of Wall Street, has become, to use former Kansas City Fed President Thomas Hoenig’s label, a virtual “public utility.”
Take away the implied safety net and “too big to fail” disappears.  It’s as simple that.

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