There’s an old truism about insanity, about how doing the same thing over and over, while expecting different results, is the essence of losing your mind. And it’s a pretty apt description when it comes to describing how the United States regulates our financial instituions. Even after the passage of the Dodd-Frank act, American banks still have enormous leeway to engage in the same sort of reckless behavior, albeit on a smaller scale, that puts them, and ultimately us, at risk.
With the bailouts in 2008 and 2009, we have tacitly accepted the idea of ‘too big to fail.’ Fine. The federal government has accepted its role as the lender of last resort when it comes to propping up banks and investment firms when their actions threaten to pull the entire economy down upon us. The problem is, that when it comes to regulation, we haven’t gone nearly far enough when the question of proprietary trading comes up. Proprietary trading is how US banks earn the bulk of their profits these days. They trade on their own account, both in stock, commodities, and futures exchanges. The problem with this is that it can put them at risk of trading against their clients’ interests, and this is something that happens with alarming regularity.
Banks have repeatedly dismissed concerns, saying that Dodd-Frank is more than enough regulation, that they can be trusted to behave responsibly, and that worries are overblown. The events of this past week involving a trader in JPMorgan’s London office illustrate the folly of such thinking. Poorly executed trades have ended up costing the financial titan over two billion dollars, and it’s likely that losses amounting to billions more are to be expected. When questioned about such losses in April, JPMorgan CEO Jamie Dimon dismissed such concerns, calling them a ‘tempest in a teapot.’
Since the passage of the Glass-Steagall Act in the late 1990s, US financial firms have had the ability to both function as commercial banks and also to engage in risky speculative activity. This makes them much more prone to failure, as was demonstrated by the events in 2008. Glass-Steagall was designed specifically to prevent such financial meltdowns, and it’s high time that it’s resurrected as an effective regulation. Note that in the period covered by Glass-Steagall, we didn’t have one single financial meltdown of a US financial institution brought on by risky proprietary trading. The regulation worked.
But now, we’re taking the assurances of financial leaders, over and over again, in spite of all available evidence that doing so is detrimental to our national interest. You could say that our stance on the issue is, well, rather insane.