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Dimon, Bernanke and what we don't know

by Robert Teitelman | Published June 8, 2011 at 12:15 PM

Financial re-regulation seems to be coming together quite nicely, don't you think? A few days ago, Treasury Secretary Tim Geithner went after the Europeans for failing to pull together what he viewed as adequate derivatives regulation, pausing particularly to highlight what he called the "tragic" failure of the U.K.'s "light-touch" regulatory regime. Today, the Financial Times reports, in one of the more entertaining little stories of late, that a senior official at the U.K. 's Financial Services Authority fired back: "Clearly, he wasn't referring to derivatives regulation because as far as I can recollect, there wasn't any in the U.S. at the time." Touche. Meanwhile, at an Atlanta conference, J.P. Morgan Chase & Co. chairman Jamie Dimon openly attacked the Federal Reserve's Ben Bernanke on the economic effects, particularly on job creation, of new bank rules. "Has anyone bothered to study the cumulative effect of all these things?" he asked Bernanke, clearly already knowing the answer. "I can't pretend that anybody really has," replied Bernanke. "We don't really have the quantitative tools to do that." The WSJ now has a video up on the exchange. Well, Ben gets points for honesty. Generally, it was not his best day. Besides his admission that economists can offer little beside cocktail opinions when it comes to the relation of bank structure and regulation to credit and job creation, he also offered what The Wall Street Journal described as "a relatively glum view of the U.S. economy," sending the stock market reeling. We should all be nervous faced with the increasingly obvious reality that our politicians, policy makers and, perhaps most important, our brand-name economists seem to have no idea what's going on out there. In another little choice nugget, the FT's Luke Johnson in the "Entrepreneur" column, launched a denunciation of economists ("The dismal science is bereft of good ideas") without even the benefit of Bernanke's confession. He gets right to the point: "I fail to see the point of professional economists," he writes. He gets angrier from there; he even names names (Vince Cable, Paul Krugman, Alan Greenspan). And this a mere page or so away from the FT's redoubtable economist and columnist Martin Wolf who, like Bernanke, is gloomy with charts about economic prospects.

There are no heroes here, certainly not in Congress (and I'm not talking about Anthony Weiner). By now, Carl Levin's report on the "massive" short supposedly put on by Goldman, Sachs & Co. has been carved up like a Thanksgiving turkey, leaving some giblets and a wishbone behind. Both the WSJ and The New York Times have participated in that destruction, helped along by documents kindly provided by Goldman. Holman Jenkins in today's WSJ seems to complete the job with gleeful invective. "To be fair [uh-oh], intellectual honesty was always extraneous to Mr. Levin's purpose. If people with freckles or fanciers of schnauzers were suddenly to become popularly reviled, Mr. Levin would position himself as a chief reviler. The politician's job is to be shamelessly, consistently wrong on every bubble, in favor of whatever is popular until it's no longer popular, against whatever is unpopular until the polarities reverse again." Goldman shouldn't relax, of course; the woods are full of enemies.

Did someone say something about the center not holding? Well, it seems to be giving way like a Mississippi levee. Let's start at the beginning. What would possess Geithner to publicly savage the Europeans, who have their own problems, and why would he particularly nail the Brits? The president, after all, just returned from a make-nice trip to our special friends across the sea. Besides, I thought there was some unwritten chivalric code among international regulators, which commands no public humiliation? Is Geithner still mad because the FSA screwed up the initial sale of Lehman Brothers to Barclays? Or is there some deeper realpolitik? Is Strauss-Kahn involved? Whatever, Geithner exposed himself like a piñata to counterattack. There are no innocents here, certainly not Geithner himself. U.S. regulation on derivatives was, as the FSA rep accurately said, all but invisible before Dodd-Frank. Any number of regulators in Britain and the Continent believe Geithner, the Fed and Congress were too soft on the banks, which they blame for everything. And the delays, lobbying, complications of any number of aspects of Dodd-Frank, including derivatives, is becoming increasingly problematic. Not that the Europeans exactly occupy high ground either. For all the talk, there seems to be no move toward breaking up their universal banks, even in the U.K., where some ring fencing of retail operations may be in the works. With the exception of Switzerland, which has moved toward steeply higher capital ratios, the Europeans want large, leveraged banks just as much as U.S. authorities seem to.

Then there's the contretemps between Dimon and Bernanke. This too is laced with the twists and turns of self-interest. Again, such a public display of pique from a bank chairman like Dimon shatters some age-old code, although he's done it before. The Fed and big banks, especially J.P. Morgan, have worked hand in glove for a very long time. J.P. Morgan may have gotten through the crisis, but the rest of the big banks were up to their necks in mortgages and credit default swaps. Bailouts did occur; too-big-to-fail is an issue. The ironies here are rich. The Fed openly orchestrated both bank consolidation, which J.P. Morgan profited from, and deregulation. This "partnership" lasted for decades, under both Greenspan and Bernanke. Indeed, by any measure except Ron Paul's, Dodd-Frank went pretty easy on the banks. And while Geithner seems to be talking higher-capital outlays for the big banks, Bernanke has pretty much soft-pedaled things. Indeed, the ascendancy of the Fed as systemic regulator par excellence, despite its tragically poor record of regulation over the past decades, suggests that there is a consensus in high policy circles that business should continue mostly as usual, with a few tweaks (this, of course, casts a strange light on Geithner's tantrum against the Europeans). Dimon seems not to want even those tweaks, which would put pressure on earnings he thinks a bank should be able to freely chase.

Still, Dimon knew Bernanke was vulnerable, and he decided to shove in the shiv. The problem is, if economists can't quantify the effect of regulation on job creation, then Dimon can't tell us that large, highly leveraged, trading-intensive banks are necessarily good for us either. We're in the dark; self-interest rules. Take capital. The Swiss are asking for high-capital ratios for its big banks; Basel III wants moderate increases; Sebastian Mallaby, in another FT column today, thinks ratios twice as high as today makes sense; and Dimon seems to want something closer to precrisis levels, or as low as lobbying can get. But how can we even have that debate without understanding what the effect of those ratios will have on the real economy? Instead, with everyone scrambling around, we end up with prime conditions for regulatory arbitrage, and escalating nationalist tensions.

It is an odd time. Many of the old verities have fallen. Little except sophistry, self-interest and lobbying have replaced them. Dimon may be self-interested, but he asked a devastating question to the former academic, Oz-like figure at the Fed: What do we know? The answer puts all these other swirling disputes in context: not a hell of a lot. - Robert Teitelman

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