a warning sign that we need to restructure the American banking system
will a center-left Obama, or Romney his center-right challenger, have the intestinal fortitude to weigh in on the need for banking reform before the big banks cause the next financial meltdown?
Eric LaMont Gregory
JP Morgan’s botched hedging strategy is a warning sign that we need to restructure the American banking system, and urgently.
The evidence suggests that the benefits derived from the economies of scale created by our very big banks are outweighed by the risk of these banks leading our economy into another crushing financial disaster.
How big is big?
Currently 20 of our biggest banks have combined assets equal to some 90 percent of the US economy. And, five of these big banks i.e., JPMorgan Chase, Bank of America, Citigroup, Wells Fargo, and Goldman Sachs marshal assets equal to 60 percent of our national economic output.
The goal of restructuring the banking system is simply to ensure that the big banks cannot trigger another financial crisis.
The problem is not the size that make these banks potentially dangerous as much as the myriad businesses that these banks are involved in.
Many economists, representing both the center-right and left, suggest that this is best done by limiting banks to their three traditional activities in our economy, that is, commercial banking, underwriting securities, and asset management services.
Had JP Morgan not been so heavily involved in the highly risky hedge funds business, as well as, equally dangerous private equity funds, trading derivatives in their own accounts, and creating markets in derivatives and other securities for themselves as well as for customers, the glaring shortcomings of the Dodd-Frank legislation might not have come to light.
The larger question is, will this center-left president Obama, or his center-right challenger Romney, have the intestinal fortitude to weigh in on the need for banking reform before the big banks cause the next financial meltdown?
The need for banking reform might be the one major issue that both the right and left in America can agree upon, as both sides have expressed the urgent need for reform before the big banks who continue clinging to highly risky business activities push the whole economy over the cliff, again.
JP Morgan, had not been able to devolve itself from its exposure, over exposure, to the lingering Japanese carry trade.
This also stands to answer the question as to whether bailing out financial institutions would send a signal to them that they could continue their risky trading practices, and the signal was that they could continue often with reckless abandon.
Go Figure. JP Morgan executive Ina Drew has taken the fall for last week's $2 billion loss at the investment bank. He is replaced by Matt Zames, previously a trader at LTCM. LTCM was the beneficiary of the first trillion dollar bailout in 1998.