The $2 billion debacle at JPMorgan Chase is empowering Democrats to strut in front of microphones, a bit smug, and proclaim, "Told ya so."
Indeed they did tell us so. Advocates of the so-called Volcker Rule could not have put the hammer on the head of the nail much more precisely. Banks, the rule says, should not use federally insured capital to make wild bets on the market, come up $2 billion short, fire some well-intending executives whose bets went awry, call the president of said bank the champion of good sportsmanship and let bygones be bygones.
Call in the FBI and it is likely they will find that no one broke the law since the Volcker rule doesn't even take effect until July. Call in the Securities and Exchange Commission and it is likely the bank was not purposefully out to defraud anyone because not every bungling idiot is a thief. But the Volcker Rule is also fundamentally misguided. The purpose of investment is to make bets and all of them are risky bets one way or another.
It is often overlooked that banking regulations are not only in place to protect John Q. Public from banks; they are also in place to save banks from themselves. The Volcker Rule, which is intended to separate commercial banks from wild investments backed by taxpayer funding, should be the most popular rule among Republicans since the invasion of Normandy. Instead, the Republicans in Washington see it as an insult to major campaign contributors in an election year. Guess who wins that argument?
Taxpayers and regulators, rightfully so, are still keeping an eye on a moral concept known as "too big to fail." The government can't allow JPMorgan Chase & Co., for example, to collapse in a heap if it means people who have never even heard of the bank are going to be hurt when it goes under.
There is an old expression: Cut off the head of the snake and the snake dies. That is what the Volcker Rule intends to do.
But there is another way to provide the same safety net: Separate commercial banks from investment banks. Literally, that would ban boa constrictors and ball pythons. You wouldn't cut off the head of the snakes, but you would only permit smaller snakes.
There are so many moving deeply entwined parts in the financial system that limiting a swipe fee for debit card uses inevitably means banks will start charging for parking spaces and install pay toilets. In other words, they will find the revenue somewhere. There is no point trying to tell a banker not to look for the loopholes, so the government might just be better off compartmentalizing.
Some argue that large investment firms are not just scary, they are also necessary. If a firm's interests are diverse enough, then an abrupt loss of $2 billion, give or take, will not bring the bank down. That is the lesson from JPMorgan Chase that everyone seems to be missing. It lost $2 billion in 15 days of trading and losses are escalating even now, but this still hasn't provoked a run on the bank.
People buy big motorcycles because they're safer, not because they're faster. Banks are like that. Big banks are scary, but safe. But that doesn't mean they should grow beyond the capacity to contain problems when they have a bad day.
In international markets Thursday, the Nikkei 225 index in Japan added 0.86 percent while the Shanghai composite index in China rose 1.39 percent. The Hang Seng index in Hong Kong lost 0.31 percent while the Sensex in India added 0.25 percent.
The S&P/ASX 200 in Australia fell 0.19 percent.
In midday trading in Europe, the FTSE 100 index in Britain slipped 1.01 percent while the DAX 30 in Germany declined 0.56 percent. The CAC 40 in France fell 0.73 percent while the Stoxx Europe 600 gave up 0.83 percent.