But that doesn't mean that he's correct that the core issue are the restrictions put on banks 5 years ago. That is so self-serving. Remember the banks got bailed out after the recession; but the people lost their homes. More money has flowed to the top during this time period, making lives harder for average Americans.
It's hard to be sympathetic to Mr. Dimon.
The 'popular wisdom' that the banks all simultaneously started acting differently, and against everyone's best interests, including their own, is foolish at best.
This is a nice write-up of the real estate crash, which underlies the recession as a whole: https://admin.fee.org/files/doclib/houseunclesambuiltbooklet...
https://en.wikipedia.org/wiki/Nationally_recognized_statisti...
Add up the value of every house in the USA. They're not hundreds of trillions of dollars.
The banks got really creative, a bunch of people made nice bonuses, then when their fancy leveraged mechanisms went bad, we all had to bail them out.
You will have to be a little more specific to discredit the economic mal-incentives created by the government and to spin that simple narrative.
And the amount of paper wealth lost in '07-08 was actually about 10 trillion, not "hundreds of trillions."
I'm not sure what you want with more specificity. You're familiar with the situation, right? You want a book report on what happened?
Yes, the government exists, and no, a few extra loans for black people didn't crash the housing market. This was a problem between ratings agencies, salespeople, and financial instrument inventors.
That's fine and all but turning around and accusing the conventional wisdom of 'lacking a deep understanding' is a bit much.
However, the fact that a narrative with political implications is "mainstream" does nothing for its credibility. I try to understand how these things work and while it's a pretty nebulous domain, the factors I presented are what seem to be the most significant I've seen in explaining the behavior of the real estate market, and further, the market at large, in '01-'08.
We are both rightfully upset that the crisis "somehow led to trillions of dollars missing" -- while paper wealth and market cycles are inevitable, the magnitude and 'unfairness' of this event is clearly a problem. However, when you then confidently assert the cause: "banks got really creative, a bunch of people made nice bonuses, then when their fancy leveraged mechanisms went bad, we all had to bail them out" without any details or refutation of the explanation I posted, to which you were responding...
Well, what I read was "I'm not sure what happened but I don't like it [rightfully so], and this narrative gives me an easy scapegoat -- an evil, shadowy figure, of sorts -- to blame, which seems to absolve me of needing to understand any of the mechanics involved, and which also happens to validate my pre-existing political beliefs."
When we have a market crash caused by private actors trading and someone says "OBVIOUSLY the problem is GOVERNMENT" I think they're arguing backwards from ideology rather than working forwards from observation.
But that's the rub: "a bank" is just some paperwork, it doesn't have interests. The reason a banking executive might want to issue bad loans is, they raise short-term profits, which translate into incentive-based bonuses. When those loans inevitably go into default, the loss isn't on the executive, it's on the corporate account and, by extension, the shareholders. Of course, when it later becomes possible to securitize the loans and foist them off onto institutional investors (who think "mortgages, what could be safer?"), the game becomes about origination.
No, a bank is typically a corporation with the shareholders you mentioned, who have immense interests in the longevity of the company.
> The reason a banking executive might want to issue bad loans is, they raise short-term profits, which translate into incentive-based bonuses.
How do they raise short term profits? The bank just gave away X dollars for the loan. The profits are only projected on paper, and they assume a given interest profit on inflation and compared to the nominal interest rate. So don't you see how holding artificially low interest rates would distort this process? And don't you see how government programs to repackage and subsidize parts of this debt would incentivize more of it?
What I truly don't understand is how so many people believe that the banking sector all of a sudden got greedier than usual in concert. There is a reason that their actions follow economic incentives, and the negative ones are largely following stimuli introduced by the government in the early 2000's.
Banks don't give away money when lending; the situation is a lot subtler than that. First, consider that, when you deposit money in your bank account, you're loaning the money to the bank. From the bank's perspective, you've given them cash, which is an asset, and they've given you the right to demand the cash back, which is a liability. This being a loan, they pay you a small amount of interest. Second, consider that you can create liabilities on yourself ex nihilo just by writing "I owe you $5" on a piece of paper and signing it, which creates an asset for the person you give the IOU to. Third, consider that, if you're incredibly trustworthy, these assets that you created are marketable---and if you've got the backing of the Federal Reserve and the FDIC, then those assets will trade at par.
With all this in mind, it should now be clear that, when a bank creates a loan, it creates the assets for the loan by creating corresponding liabilities on itself, which is, new deposit account balances. That is, the bank creates "bank money" (deposits) ex nihilo when issuing a loan. The borrower creates a corresponding asset/liability pair, in the form of the loan itself (i.e., similarly to a bond), which is an asset of the bank.
In this situation, losses only occur if the loan goes into default and gets written off the bank's balance sheet. As long as the loan is in good standing, the created deposits (liability) are in balance with the created debt instrument (asset). On the other hand, the loan being paid off reduces deposits (reduction of liabilities), of which the principal component is used to write down the loan (reduction of assets) while the interest component is profit (increase in capital). There are more layers to this (what if the deposits are cashed out, or transferred to another bank?), and answers to those questions concern the actual role of the Fed, but suffice it to say, those questions don't refute this discussion.
So this is why a bank executive would do this. As long as the loan remains in good standing, it generates profits. Once the loan defaults, those profits are wiped out by the write-down of the remaining debt (reduction in assets), and while the bank can foreclose (take over the house, which increases assets), that usually isn't to the bank's favor. But that window, where profits go up and before the losses are realized, is a gold mine for corrupt executives.
This game was played before, which was called the Savings and Loan Crisis. The thing that changed was deregulation: the S&L debacle got people sent to prison, while the latest resurgence of liar's loans came in an era of notoriously ineffective banking oversight.
> but suffice it to say, those questions don't refute this discussion.
You should address them -- you've completely avoided the point. There is no dispute about the mechanism; I'm interested in the cause / incentive that drove the results.
> The thing that changed was deregulation: the S&L debacle got people sent to prison, while the latest resurgence of liar's loans came in an era of notoriously ineffective banking oversight.
Perhaps you missed the part about unpredictable Federal Reserve price-setting... from Wikipedia: "In 1979, the Federal Reserve System of the United States raised the Discount Rate that it charged its member banks from 9.5% to 12% in an effort to reduce inflation. The building or savings and loans associations (S&Ls) had issued long-term loans at fixed interest rates that were lower than the interest rate at which they could borrow. In addition, the S&Ls had the liability of the deposits which paid higher interest rates than the rate at which they could borrow. When interest rates at which they could borrow increased, the S&Ls could not attract adequate capital, from deposits to savings accounts of members for instance, they became insolvent. Rather than admit to insolvency, lax regulatory oversight allowed some S&Ls to invest in highly speculative investment strategies."
Someone like you would probably blame everything on the last sentence, whereas I am more interested in the root cause.
As for the questions that were set aside, one role of the Fed is to ensure that enough ("high-powered") money is available to ensure that transactions clear, which is part of monetary policy (including, as you sort of mentioned, the discount window). Asymmetries between banks are resolved through interbank lending. Because all these mechanisms are available to cover their reserve needs, banks will issue loans (creating deposits) based on the creditworthiness of their applicants, not on their own reserve positions. But these are secondary matters, which is why I didn't talk about them earlier.
>Someone like you would blame everything on the last sentence, whereas I am more interested in the root cause.
On the one hand, interest rate risk is precisely why we allow lenders to charge interest; otherwise it would be money for nothing. On the other, I suspect you just want to blame the federal government, because that's ideologically convenient. For my part, I'm skeptical of the Fed's belief (and general economic orthodoxy) that interest rate increases are the correct response to inflation, but that's even more secondary. More importantly, we have the issue that normal people need to be secure in their bank deposits, and since the government is us, it's perfectly reasonable to make that happen. In particular, once you start insuring deposits, you really need to be ready to regulate.
As for S&Ls, deregulation was the response to their interest rate troubles (they went for deregulation rather than closure because of free market orthodoxy), but then that turned out to be a disaster. The "control fraud" I talked about, where executives pillage the bank, was rife in the latter days of the S&L boom. Past that, y'know, it was a situation of making extremely risky loans with capital from insured deposits, because there was nothing holding them back. This is about as far from "won't somebody think of the bankers" as it gets.
The FDIC has a fair write-up of it: https://www.fdic.gov/bank/historical/history/167_188.pdf Indeed, if you keep a vaguely open mind and know anything about the global financial crisis, you ought to spot one or two similarities, that have nothing whatsoever to do with the federal government strong-arming put-upon banks to make unreasonable loans to poor people---and, if anything, a failure of the federal government to lay down the hammer on private-sector fuckery.
I would advise you to take your own advice and read the initial article I posted. The solution is not absolutism on either end of the spectrum, but our current system is too far on the over-regulated side with convoluted, "unintended consequence" programs, regulations, and infrastructure.
The sooner we can come to a consensus on that, the sooner we can employ smarter, simpler regulations that the average educated person can read and understand in fewer than 100 lifetimes.
Do you mind rephrasing your thoughts? Maybe I'm misunderstanding something.
Yes, banks got bailouts. I didn't like them at the time and I don't like them in retrospect.
But it's not necessarily true that all the regulations are fine because banks had bailouts.
And I'm not willing to grant that regulations are fine just because banks and bankers are one-percenters and unsympathetic.
I do think that if we would like to avoid bailing more banks out in the future, some changes need to be made in the way that banks conduct business. To my mind, regulation seems the most straightforward path to this goal.
It's not that complicated to break up too big to fail entities, encourage dynamism and competition in the sector, and just let them use traditional methods of failure (bankruptcy, merger, etc.) going forward.
Heavy regulations, perhaps counter-intuitively, benefit too-big-to-fail banks the most since the overhead of compliance is relatively small compared to small banks and banking startups.
Of course all regulations aren't fine. The problem is they are a necessary evil. Individuals don't always act with integrity; it's important that we restrict them by some mechanism to attempt to have them do so. On top of that, individuals can lose perspective easily when working in large corporations, where they focus on the bottom line of the Company and not the larger impact of their actions. This is why regulations/laws are necessary.
In some cases regulations create defacto monopolies, because the regulations themselves act as a barrier to entry for new players. In these cases, regulations are horrible. They skew the market place, and have all sorts of other negative effects on competition (the healthcare industry is a good example of this). So there needs to be restraint when putting regulations in place.
There is a balance, not all regulations are good, but neither are they all bad. Our government should be acting in our best interests to find a good balance there, and I agree with the article that because of the grid-lock it's not capable of doing that. Our political system has become entrenched on both sides, with little middle ground, for this we can blame gerry-mandered districts.
To stay on topic though; The banks came out generally far ahead of where the American people did after the recession, which given the shenanigans they used doesn't seem fair (to me at least).
New regulation will only serve to concentrate banking power & wealth in the hands of increasingly few players.
[1] https://www.americanbanker.com/opinion/surprise-big-banks-lo... [2] https://ilsr.org/vanishing-community-banks-national-crisis/
https://www.theguardian.com/business/blog/2012/jun/13/jp-mor...
I don't believe it's particularly contentious in the industry that JPM didn't need bailing out.
I strongly suspect that what he meant here was that he accepted the reasoning for asking all the big banks to participate. Not that he agreed that JPM needed the funding.
With Lehman down and ML and MS likely to go on the Monday, I can quite well imagine that everyone there accepted that a large, collective response was the only realistic option.