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Rep. David Schweikert, (R-Ariz.), and Harvard Economist Jeffrey Miron on J.P. Morgan’s losses and whether regulations could have prevented it.
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Growing joining me now Republican congressman David Schweitzer of Arizona and Harvard economist Jeffrey Miron welcome to you both.
Congressman I'll start with you do we need more regulation.
Well you always worry when the incident just happens and you have the politician front of the camera like I am.
We need to collect the facts we need to find out you know did this sort of break the wall.
On the what's -- systemic you would have caused the problem or was this just really bad risk management at JPMorgan.
But it ultimately it was on their own book of business and it was their own risk capital.
Well at what do you say Jaffray agony that I can imagine you probably think they should be no more new roles.
I certainly don't think this incident -- tells us anything about new rules I fully agree with what that represents weicker just said.
The people who lost here were the shareholders of JPMorgan -- JPMorgan apparently made a really bad decision so that's bad for the shareholders but it's irrelevant for everybody else it's just the way markets work that sometimes people lose money in financial markets that's actually a good thing that sometimes traders are punished.
I'm not a bad -- so no I don't see a need for regulation here at all.
Bumped up I hear what you're saying but I think the most people were put on edge because the last time we have big losses like this it turned into a monster a -- as it turned into 2008.
And it turned into what was called the Great Recession a lot of people every time there's a big lots and -- again this was two billion.
People get a little anxious congressman -- you.
SEC is stepping in they're not calling it a full scale investigation not yet.
But -- 440 -- that wouldn't tell you about the size in the intensity of this problem.
Well it.
Look it's absolutely rational.
To learn and understand what happened.
But we have to be really careful -- let's face it we're entering the political season.
We and that and the political folks want to use this is a wage for their vision of what the financial sector should look like.
The reality of it is there was someone on the other side of the trade that made money.
On do we want -- now go reach over and -- them.
It's what you really trying to understand is.
Where they speculating.
With government insured money with money that was client money.
Or would they just dumb with shareholder money if -- -- and what shareholder money guess what they get to do that.
Well that's I was gonna take that to Jeff next where it was just proprietary trading what was it and wasn't Dodd-Frank supposed to get rid of proprietary trading -- banks.
Well Dodd-Frank on the Volcker Rule -- particular is supposed to limit proprietary trading by the banks.
But of course.
Rules for Dodd-Frank have not yet been fully designed agreed to implement -- -- they're not in place yet.
Whether -- this trade -- lots of other traders are proprietary trading.
Is really hard to figure out whether trade is simply making a -- or whether particular trait is genuine hedging.
That's why did Dodd-Frank in particular the -- -- have been so problematic and so long delayed.
It's almost impossible to come up with a clean in -- consistent definition.
And so we keeps spinning our wheels trying to accomplish something which probably is the call possible.
Well I think that's a good point you know it is the last night yesterday afternoon.
JPMorgan talking about -- there fortress balance sheet you know -- -- talking about -- -- -- over again not only in the conference call but also in their press releases.
And congressman is that reassure you do you feel good about things when -- and when you hear that phrase fortress but balance sheet or do you think it's PR spent.
No my understanding is they have what -- -- a hundred billion dollars and revenue days still turned what four billion dollars in profit.
So so from a -- standpoint.
This is not a crisis if -- on the stock -- might be a little annoyed right now but this is not a cascade of -- for the banking system.
Well I hope you're right definitely.
I wanna play some sound from Ben Bernanke because it just happened to coincide with the story.
-- comments yesterday well in retrospect they're kind of funny listen to the Fed Chairman.
Conditions in the banking system and the financial sector more broadly have improved significantly in the past few years.
Banks have strengthen their capital and their liquidity positions.
The economic recovery has facilitated the rebuilding of capital.
And helped improve the quality of the loans and other assets on banks' balance sheets.
Main banks are in great shape everything's wonderful nothing.
Markets.
I just is -- Bentley is he blind I mean what what's going on here.
Now I think I agree with most -- all all of what he sat this one incident is a little blip in the space of the entire banking sector has represent our -- just said.
JPMorgan has a hundred million deaths -- hundred billion dollars in assets revenue.
And this is two billion of course that's not good but it's it's teeny compared to the size of the sector.
Now we may still have problems in the banking sector there may be a lot of way too much money invested in European banks are betting that they're not gonna be problems in Europe.
But this particular incident is one incident until there is really clear evidence that there's something systematic and widespread.
We should just say this is a blip then the shareholders of JPMorgan lot to deal -- the that this is a blip in a market place.
That.
You know synthetic.
Trading.
That you know we've we've seen before and often does not end well and I think that's why people got so upset according take -- to a question that apparently is being debated.
On Wall Street in Washington have these banks gotten just to.
-- take a look at these numbers JPMorgan Chase total assets 2.2 six trillion.
Bank of America comes in second two point 132 -- and Citigroup -- one point 87 trillion.
It goes on and on these are huge institutions were one of these and I'm not saying that what happened yesterday the news that was released.
If one of these events but it's something cataclysmic were to happen to one of these banks.
Can't -- -- -- too -- to bail at this point.
Congressman -- these banks need to be broken up.
I don't believe they need to be broken up what you need to do is make sure you have a competitive market.
So those mid -- banks can grow and basically -- market share bill ultimately it's actually our own fault.
Is the way the Fed intervention has worked the way we recapitalize the banks.
That actually ended up now creating super institutions in many ways it's government policy itself that helped create this.
I think that's an excellent point Jeff you want to jump in here first second because.
I'm into two what you have to say about whether these banks are too big.
Well like I think there is a sense in which they're too big they're too big in the following way.
We the political system won't let them fail because they're afraid of all right events that will happen the negative things will happen if a -- -- fails.
But as a congressman was emphasizing the right way to get them to be smaller as one.
Don't bail them out when they're in trouble when a big bank is gonna fail let -- -- then you'll have smaller banks and second.
Have appropriate sort competitive marketplace so that small and medium -- banks can grow provide competition.
For a -- -- that happen to be big at the moment a deliberate attempt by government to break up banks.
That's socialism that's not -- we want we want.
-- -- at the right Paul -- Your -- ended up with a lot of small medium sized banks closing over the last few years and congressman I think you're right acting government policy -- a lot.
