Cost Benefit Analysis

By J.M. Hamilton (6-18-11)

“The trouble ain’t that there is too many fools, but that lightening ain’t distributed right.” – Mark Twain

Mr. Twain was a very sharp man, and in addition to the above quip, he also offered up that “truth is stranger than fiction, because fiction is obliged to stick to possibilities.”  A better thought could never sum up the recent event of Jamie Dimon, a very sharp man in his own right, and the CEO of  JP Morgan Chase, sidling up to Chairmen Bernanke, and asking if the Fed had done the cost benefit analysis on all the new financial regulation that was harming the banks and the economy. 

The chairmen, possibly at a loss of words, admitted that no such analysis had been done. “’It’s too complicated,’ Bernanke said, adding that he said he thinks there’s a way to safely regulate banks while preserving their ability to deliver ‘basic financial services.’”  Also per Bloomberg, Mr. Dimon is quoted as follows:   “I have a great fear someone’s going to try to write a book in 20 years and the book is going to talk about all the things that we did in the middle of the crisis to actually slow down recovery.”

Many of us have a fear too, but it is quite the opposite of that which Mr. Dimon has expressed, and may be unfolding before our eyes in Europe, presently.

Now just to back up for a moment, a key focus among government regulators, politicians and the bank oligarchs, such as Mr. Dimon, is the regulation of credit default swaps, derivatives, and hybrid derivative products.  These products when utilized correctly can have the impact of providing insurance to the direct counterparties of a business or contractual agreement; however, when these products fall outside regulatory purview (as has been allowed to happen by successive Democratic and Republican administrations), they have been allowed to turn Wall Street into, perhaps, the universe’s largest gambling casino.  How so?  Roughly 90% of all derivative products sold don’t involve the counterparties to the contract itself, such as the sale of government bonds, but rather, are being sold to speculators who are betting for financial gain.  Moreover, these products, worth hundreds of trillions in notional value, are inadequately secured or collateralized.   So that when a calamity does occur, not unlike that presently unfolding in Europe, or that which occurred back in 2008 when Goldman, Wall Street banks, shadow banking, and AIG burned down the Western economies, it is not the too big to fail banking institutions who pay (like Mr. Dimon’s bank), but rather, the governments who pay.  That is to say, the tax payer, and we pay and continue to pay in so many ways for the last crisis.

Which brings us to the present day, Mr. Dimon, and the Wall Street cartel that, via its mercenary battalions of attorneys and lobbyist, have thwarted financial and derivatives regulation at every turn, actually played a large role in writing Dodd-Frank, and have engaged in regulatory and government capture, since time immemorial.

So how might have Chairmen Bernanke responded to Mr. Dimon?  Well, if Mr. Bernanke channeled his inner Volker, we can imagine the following written response.

Dear Mr. Dimon,

Yes, the Fed has studied the costs of failing to regulate the derivatives market, please allow me to recap key costs for you; perhaps you may have observed them personally outside the window of your office, perhaps not.   The source of our findings is the post financial crisis economy.  The costs of the U.S. failure to regulate the derivatives/credit default swaps market are as follows:

$$$ Rising and sustained unemployment in the U.S., officially, set- as of this day- at greater than 9%; but per shadow government statistics the unemployed/under employed  may be more accurately set at 20% or greater.  That’s a whole lot of pain and suffering, so that Wall Street can enrich itself from an unregulated product, and a financial product that Wall Street banks are ill-equipped to pay for in the event of a catastrophe.

$$$  Spiraling national debt to bailout the Wall Street banks, and the after math of our failure to regulate the derivatives market (with maxed out social spending, and cuts to educations, et al.), so that we are now staring at an eye-popping national debt in excess of $14 trillion.   America, perhaps, is looking more like Greece by the day, Mr. Dimon, but for the grace of God, and holding the world’s fiat currency.

$$$ A housing market, the sector leader in economic recovery, toasted and in ruins.   Seems as though the foreclosure mill is gummed up with erroneous bank paper work, problematic debt securitization (CDO’s- hybrid derivative products), robo-signers…. all Wall Street products and by product of the last liquidity bubble.

$$$ A probable double dip recession that maybe more acute than the original catastrophe, and a Federal government that can ill afford another round of bank bailouts, or continue to support those in need as a result of Wall Street’s worst excesses.

$$$ Nascent inflation on the rise, and rabid speculation in commodities and oil, as a result of the Fed printing trillions in dollars to bailout the Wall Street and European banks.  A greatly devalued and diminished U.S. currency, so that the talk is no longer when will the U.S. dollar stop becoming the world’s fiat currency, but rather, what will replace it.

$$$ The Euro in crisis, brought to you by Greece (and assorted PIIGS), which purchased credit default swaps from Goldman Sach, Et Al., so as to obscure its national debt to gain E.U. admittance, not unlike a computer virus or Trojan Horse I might add.

Yes, Mr. Dimon, we have done the cost benefit analysis, and while you and Wall Street have enjoyed a prosperous trip back from the brink, courtesy of QE1, QE2, and a whole raft of government programs and subsidies, the balance of the U.S. economy stumbles on or fails.  The U.S. consumer, as they like to say in Boston and greater confines, is "scrod."  “Stagflation” and “Japanese Economy” are the watch words of the day, due to our failure to regulate your esteemed product.  Please understand we would like to avoid another economic Hiroshima, and whatever hit your bank profits might receive as a result of the “regulation lite” that is Dodd-Frank, well, that’s a cost we are willing to suffer.

Yours truly…. Ben.

The bitter irony is perhaps the person most capable of offering up grand insight and design into derivatives regulation is Mr. Dimon, himself; but that would require Mr. Dimon to abdicate responsibility  to JP Morgan Chase, and realign his allegiance to ordinary Americans or roughly 99% of us.  Let’s hope that the lightening, that is financial deregulation in the 80’s, 90’s and 00’s, doesn’t strike the U.S. economy twice.  My guess is a second bolt is descending upon Europe, as I write this editorial.

If parents don’t allow children to play with guns and knives, and the Allied Powers did not allow post World War Germany to re-arm for a period of time, than why would the world allow Wall Street tycoons to play with unregulated derivative products?

P.S. It appears that the world will have to suffer at least another financial meltdown before we receive global financial regulation containing the utilization of derivative products.  Hang on to your sports bras and jock straps gals and guys because this ride may turn turbulent.  God bless us all.