Thursday, September 29, 2011

Basel III -- Taking away Jamie Dimon's Toys

Most people have by now heard the ridiculous claim by Jamie Dimon, CEO of JPMorgan Chase, that the new Basel III rules are "anti-American." The New York Times has an interesting set of contributions by various people on whether Dimon's claim has any merit. You'll all be shocked to learn that Steve Bartlett, president of the Financial Services Roundtable -- we can assume he's not biased, right? -- thinks that Dimon is largely correct. Personally, I tend to agree more with the views of Russell Roberts of George Mason University:

Who really writes the latest financial regulations, where the devil is in the details? Who has a bigger incentive to pay attention to their content — financial insiders such as the executives of large financial institutions or you and me, the outsiders? Why would you ever think that the regulations that emerge would be designed to promote international stability and growth rather than the naked self-interest of the financial community?

I do not believe it’s a coincidence that Basel I and II blew up in a way that enriched insiders at the expense of outsiders. To expect Basel III to yield a better result (now that we've supposedly learned so much) is to ignore the way the financial game is played. Until public policy stops subsidizing leverage (bailouts going back to 1984 make it easier for large financial institutions to fund each other’s activities using debt), it is just a matter of time before any financial system is gamed by the insiders.

Jamie Dimon is a crony capitalist. Don’t confuse that with the real kind. If he says Basel III is bad for America, you can bet that he means "bad for JPMorgan Chase." Either way, he’ll have a slightly larger say in the ultimate outcome than the wisest economist or outsider looking in.
Sadly, this is the truth, even though many people still cling to the hope that there are good people out there somewhere looking after the welfare of the overall system. Ultimately, I think, the cause of financial crises isn't to be found in the science of finance or of economics, but of politics. There is no way to prevent them as long as powerful individuals can game the system to their own advantage, privatizing the gains, as they say, and socializing the losses.

But not everyone is convinced of this by a long shot. Just after the crisis I wrote a feature article for Nature looking at new thinking about modeling economic systems and financial markets in particular. Researching the article, I came across lots of good new thinking about ways to model markets and go beyond the standard framework of economics. That all went into the article. I also suggested to my editor that we had to at least raise at the end of the article the nexus of influence between Wall St and the political system, and I proposed in particular to write a little about the famous paper by Romer and Akerlof, Looting: The Economic Underworld of Bankruptcy for Profit, which gives a simple and convincing argument in essence about how corporate managers (not only in finance) can engineer vast personal profits by running companies into the ground. Oddly, my editor in effect said "No, we can't include that because it's not science."

But that doesn't mean it's not important.

But back to Basel III. I had an article exploring this in some detail in Physics World in August. It is not available online. As a demonstration of my still lagging Blogger skills, I've captured images of the 4 pages and put them below. Not the best picture quality, I'm afraid.

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