Why We Regulate … What did JPMorgan actually do? As far as we can tell, it used the market for derivatives — complex financial instruments — to make a huge bet on the safety of corporate debt, something like the bets that the insurer A.I.G. made on housing debt a few years ago. The key point is not that the bet went bad; it is that institutions playing a key role in the financial system have no business making such bets, least of all when those institutions are backed by taxpayer guarantees. For the moment Mr. Dimon seems chastened, even admitting that maybe the proponents of stronger regulation have a point. It probably won't last; I expect Wall Street to be back to its usual arrogance within weeks if not days. But the truth is that we've just seen an object demonstration of why Wall Street does, in fact, need to be regulated. Thank you, Mr. Dimon. – New York Times
Dominant Social Theme: We need more of "it," please.
Free-Market Analysis: Paul Krugman is out with another weary defense of massive financial regulation. The US Leviathan is in the process of strip-searching seniors and infants at airports for reasons it cannot aggregately define, but Krugman is still a true believer.
Actually, of course, he is not. The New York Times, Krugman and a coterie of additional people and resources are seemingly part of a larger elite effort to first justify and then create global governance.
This idea, in fact, hinges on regulation. Without regulation there is no apparent reason for government, nor the mercantilism that it gives rise to. Regulation – its timeliness and appropriateness – must be defended at all costs. And defend it Krugman does.
Banks are special, because the risks they take are borne, in large part, by taxpayers and the economy as a whole. And what JPMorgan has just demonstrated is that even supposedly smart bankers must be sharply limited in the kinds of risk they're allowed to take on.
Why, exactly, are banks special? Because history tells us that banking is and always has been subject to occasional destructive "panics," which can wreak havoc with the economy as a whole. Current right-wing mythology has it that bad banking is always the result of government intervention, whether from the Federal Reserve or meddling liberals in Congress. In fact, however, Gilded Age America — a land with minimal government and no Fed — was subject to panics roughly once every six years. And some of these panics inflicted major economic losses.
So what can be done? In the 1930s, after the mother of all banking panics, we arrived at a workable solution, involving both guarantees and oversight. On one side, the scope for panic was limited via government-backed deposit insurance; on the other, banks were subject to regulations intended to keep them from abusing the privileged status they derived from deposit insurance, which is in effect a government guarantee of their debts. Most notably, banks with government-guaranteed deposits weren't allowed to engage in the often risky speculation characteristic of investment banks like Lehman Brothers.
This system gave us half a century of relative financial stability. Eventually, however, the lessons of history were forgotten. New forms of banking without government guarantees proliferated, while both conventional and newfangled banks were allowed to take on ever-greater risks. Sure enough, we eventually suffered the 21st-century version of a Gilded Age banking panic, with terrible consequences.
It's incredible that Krugman is allowed to write this sort of thing and publish it in a major newspaper. This is one of the reasons we write so much about what we call the Internet Reformation. The Internet itself has provided an alternative viewpoint to Krugman's perspective. But he acts as if the 'Net doesn't exist.
In fact, the creation of the Federal Reserve led immediately to the printing of vast quantities of money that caused first the Roaring '20s and the stock market crash and Depression.
The moguls at the Fed were NOT supposed to print as money as they did – but they contravened the dollar/gold link in place at the time and did it anyway.
As far as the "Gilded Age" is concerned, this is a misstatement of time and place. The era of wildcat banking took place BEFORE the Civil War not after it.
And so-called wildcat banks were made weak by government mandates. Such banks often could not have more than one branch and their initial capital was secured by shaky municipal bonds provided by local towns, cities and states. When the bonds were thought to be on the verge of insolvency, the banks were subject to a run.
Krugman, we can see, has it reversed. Bank runs were caused by regulatory demands. And central banks themselves printed too much money – apparently illegally – causing first a great boom and then a bust.
None of this is secret history anymore but Krugman apparently has never cracked a modern book or at least not visited the thousands of websites that would first clarify and then rebut his perspectives.
That Krugman is presented as some sort of "leading mind" and that The New York Times is still to be seen a prestigious provider of news is discouraging in this day and age.
On the other hand, both Krugman and the Times have shed considerable credibility in the past decade as the Internet has continually explained the Way the World Really Works.
This is the problem the power elite has. This is the reason in aggregate it wants to "shut down" the Internet. The lies that are spun to justify world government are not working anymore. But history shows us that most often we cannot go back.