The recent disclosure of JP Morgan Chase’s losses of more than $2 billion in a few weeks generated two types of alarm. One was that we were too lax in our regulatory measures that restrain risky investment bank speculation. Others were alarmed about the possibility of an overreaction that would result in hasty controls which would stifle the free market. After all, they argued, JP Morgan Chase has assets of more than $2.3 trillion, which makes it evident that neither they, nor the economy, were endangered by this momentary embarrassment.
One thing is fairly certain, however. This singular banking loss will energize the efforts to make the Volcker Rule more palatable to lawmakers. This rule bars investment banks from proprietary trading. Federally insured banks are not permitted to speculate in some forms of very risky trading. Those restraints have produced stiff resistance to the Volcker Rule.
Jamie Dimon. “In hindsight, the new strategy was flawed, complex, poorly reviewed, poorly executed and poorly monitored. The portfolio has proven to be riskier, more volatile and less effective than we thought.”
When interviewed, Paul Volcker would not comment on the status of the rule that bears his name. When he testified before the Senate Banking Committee, he then made a telling insight. “I could give you stories all day about lobbyists making things more complicated. They may do it because they want to disrupt the whole process,” he said. In short, they want regulatory reforms to fail.
The Dodd-Frank legislation is calculated to restore the protections of the Glass-Steagall Act, which separated savings banks from the more speculative investment banking. There are also new measures to monitor several new investment practices that are judged to have contributed to the 2008 financial crisis.
It is notable that the candid and openly offered statement, given by Dimon, was that of an able and respected leader within the investment community. What would we do if a sizeable number of CEOs would go public with a similar story? Would we be more inclined to pressure Congress to pass the provisions in the Dodd-Frank legislation? Those who are fervent believers in a free market will oppose any such reforms.
What does history show about the idea of free trade? This idea was put forward in England when business was closely regulated by government. Adam Smith argued that regulations hindered the market and that it would work better if regulations were removed. In fact, he argued that free markets would be self-regulated as if by “an unseen hand.” If there is such a source of power, it is severely challenged by a host of hands that are easily seen. An array of clever lawyers, lobbyists, wealthy donors, friendly politicians, sympathetic judges and apathetic citizens are all making a very visible impact on the market — relentlessly seeking an advantage. There is no “free” market.
In America, as the industrial revolution unfolded, the free market became the province of huge monopoly organizations that dominated the marketplace. The reaction was the creation of the Sherman Anti-Trust Act, the Clayton Act and other regulatory laws. Since then, we have had swings from deregulation to reregulation with our economy, experiencing degrees of more or less freedom in the marketplace.
The bottom line in this debate over freedom in the market comes down to a simple reality. Free markets, like free persons, are all limited by the need for an orderly society. We are free to drive a car, but we cannot permit speeding near a playground where children are playing. We accept that rule because it is rational. The same is true in market relationships. We accept rational limitations for the safety and well-being of others. It is common sense that we cannot accept the situation where huge organizations socialize their risks and losses, while privatizing profits. Permitting such an arrangement to exist would be a very high price to pay for a “free” market.
Allan Powell is a professor emeritus of philosophy at Hagerstown Community College.