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Too Glib to Fail

June 19, 2012

It’s been quite a while since any information or opinion about populist, anti-status quo movements occupied this website. Sorry about that (horrible pun). Perhaps that is because third parties rarely have the organizational or infrastructural strength to mobilize much in the way of practical political power in America. Of course, that may be because of cognitive, heuristic, and sheer historical biases inherent in the American populace. But whatever the cause, it has been apparent for a long time before Occupy that the true utility of third parties has been to force the center two to adopt and incorporate the best of their ideas. And perhaps because the race between Obama and Romney is all about highlighting false dichotomies, it has seemed to me that these valuable ideas that should be moving to the center has been somewhat forcibly frozen out.

For an example close to the philosophical (and geographical) heart of Occupy, when upwards of $3 billion evaporated out of J.P. Morgan’s coffers on some ill-conceived and poorly executed trading strategy, JP chalked it up to the fact that their investments had become “complex and hard-to manage risks.” These are trading strategies that are the products of the hyper-intellectualized markets at work: the complex hedging strategy was meant to account for the toxicity of the assets they were already holding from the last recession. But the buck doesn’t stop there; gigantic losses in a firm as central as JP can invariably have a toxic effect on the broader market if a fire sale threatens the overall stability of a financial institution. Luckily, JP was far too big to fail from a mere $2-3 billion loss.

When hauled before Congress to explain why JP, which had received billions in the TARP bailouts, was making the kinds of risky financial investments that precipitate crisis in the first place, Jamie Dimon, JP’s CEO, admitted that the losses were indefensible. The high risk factors to this investment strategy were supposed to have been disclosed to outside regulators as a result of the new Dodd-Frank financial oversight law, but apparently those disclosures were too little too late, and these kinds of trades would have been entirely precluded by reintroduction of the Volcker Rule, which would restrict the ability of banks whose deposits are federally insured from trading for their own benefit. But despite this significant loss, Dimon said that these losses were no reason to get America’s regulatory panties in a bunch.

The 2010 Dodd-Frank financial oversight law, he said, has produced a swarm of uncoordinated regulators, and he warned policymakers that they must carefully craft the Volcker rule ban on banks making speculative bets with their own money.

As a result of all of this baited breathing, waiting to see the outcome of this test case of Dodd-Frank (and maybe the Volcker Rule), JP is the too-big-to-fail bank of the moment. Uncoincidentally, it also has one of the coziest relationships with Washington, D.C. of any institution in America. ProPublica (probably the best investigative journalism happening in American politics today), took the time to chart the nature of the relationship. The insularity of these relationships is all the more reinforced when you look at the feistiest portion of Dimon’s testimony before Congress:

Democratic Senator Jeff Merkley also pointedly reminded Dimon that JPMorgan, now the nation’s largest bank by assets, received Troubled Asset Relief Program assistance during the financial crisis.

“I think you were misinformed. I think that misinformation is leading to a lot of the problems we are having today. JPMorgan took TARP because it was asked to by the Secretary of the Treasury,” a testy Dimon said.

Right, JP did the taxpayers a big favor by taking the TARP money. Paulson asked JP to buy Bear Sterns for America, and America would put up the cash to make it happen. How can we blame JP?

Given that Republicans are quick to equivocate ideas about free markets with the commercial advantage and profitability of banks, it is no surprise that we now have a he-said/she-said about whether or not to increase oversight on banks. We seem to have forgotten the lessons of 2009/10 that these banks have so thoroughly enmeshed themselves in the scale of our economy that they threaten to bring everyone down with them on a sufficiently large and risky bet (literally: too big to fail). So what lessons of history have we learned?

It seems as though Occupy bore witness to lessons of history that already have been thoroughly forgotten, or lobbied away by a sophisticated and well-functioning machine. Even in the context of the hearings, Dimon restated JP’s recent lobbying message against subjecting overseas bank branches to the same regulations that are imposed in the United States because it would make them “less competitive” (read: less able to make very risky trades). Perhaps more chillingly, Dimon pointedly reminded the Representatives who grilled him about the extent of JP’s lobbying activity,

Lobbying is a constitutional right and we have a right to have our voice heard.

This may be the scariest aspect of this current economy: that the corporate plutocracy we live in may be theoretically guaranteed when a meritocracy is not sufficiently tempered by democratic redistribution and aggressive equalizing of opportunity.

Such a ruling class would have all the competitive ferocity inculcated by the ceaseless jockeying within the institutions that produce meritocratic elites, but face no actual sanctions for failing at their duties or succumbing to the temptations of corruption. It would reflexively protect its worst members; it would operate with a wide gulf between performance and reward; and it would be shot through with corruption, rule-breaking and self-dealing, as those on top pursued the outsized rewards promised for superstars. In the same way the bailouts combined the worst aspects of capitalism and socialism, such a social order would fuse the worst aspects of meritocracy and bureaucracy.

So, before we ease back into our false dichotomies (and the Volcker Rule gets maimed and gutted with technicalities and loopholes), maybe we ought to revisit Occupy, and think back to what it was that was compelling about it last year (yes, it was just last year). What ideas should we be demanding that politicians take cognizance of as they mount their new bids for elective office? How about actually passing the Volcker Rule (not exactly a third-party idea, but at this point…), and creating a system of government that will be able to actually stand up to gigantic, too-big-to-fail, too-sophisticated-to-be-regulated firms? If we don’t start making some demands, I have a pretty good idea of who will.

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One Comment leave one →
  1. June 22, 2012 2:11 pm

    Fantastic.

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