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Can’t markets decide future of major banks?

May 22, 2012
Gary Andersen, Lee Smith , Fairmont Sentinel

There has been a hullaballoo in recent days about a $2 billion trading loss at JPMorgan Chase, the nation's biggest bank. The Securities and Exchange Commission is investigating the bank's disclosures to shareholders, while the FBI has launched a preliminary criminal investigation into the loss. We'll let those matters play out.

On the political front, the argument is that fresh regulations and more oversight of banks are needed. Of course, that has been the argument of countless officials over decades, or centuries. In every crisis, new regulations are rolled out, and we are told they are needed to avert the next crisis. Then, at the next crisis, we are told more regulations are necessary.

There have been and will continue to be banking losses, or crises. Regulation will not stop losses. Nor will it stop the "bubbles" that develop in economies; bubbles that eventually burst, creating downturns in economic growth. Capitalism involves profits and losses. At JPMorgan, the $2 billion loss is only possible because the bank remains profitable. It may not have made a wise decision on a specific trade, but what is the government going to do? Stop trading? How and by what standard?

If the government wants to make a difference in banking, it should consider getting out of the way. It, after all, is the entity that created a system in which some banks are "too big to fail." By not allowing banks to fall when they deserve it, the government is protecting bad actors. If those banks then go back to engaging in risky behavior, who would be surprised? Was JPMorgan's behavior "risky"? We don't know. Let the markets decide.



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