Jamie Dimon Has Another Good Year

In May, Jamie Dimon, the head of JP Morgan Chase, told his shareholders that the bank just had probably “our finest year ever.”  Despite being close to the epicenter of the worst financial crisis since the Great Depression, Dimon’s bank was able to make a great deal of money, obtain government support when needed, and reduce that support level quickly when the overall situation stabilized – thus freeing the bank of constraints on its pay packages (and other activities).

It looks like the full year 2009 may turn out even better than Mr. Dimon expected in May.  Speaking at the Goldman Sachs US Financial Services Conference on Tuesday (December 8), Jamie Dimon presented JP Morgan Chase’s third quarter results (year-to-date).  His slides are informative, but if you want to pick up the nuances in his message, listen to the audio webcast (you have to register, but it’s free; here are back-up/alternative links).

Mr. Dimon’s remarks were informative at two levels: how JP Morgan Chase operates, moving forward; and how that reflects the likely outlook for the US economy.

According to Mr. Dimon, JP Morgan Chase has 6 “standalone pieces”: Investment Bank, Retail Financial Services, Card Services, Commercial Banking, Treasury and Security Services, Asset Management (p.3 of his slides).  These businesses help each other, although Mr. Dimon was studiously vague about exactly how.

In fact, there is nothing concrete about synergies or economies of scope in the slides.  In his oral presentation, Mr. Dimon makes some high level remarks about “business flows and fees” but the exact meaning is unclear.  For example, presumably clients of the Asset Management business get the best possible pricing if they buy or sell over-the-counter (OTC) derivatives through the Investment Bank.  But then what exactly is the advantage to the client of having these two businesses owned by the same company?  There’s always more transparency in arms-length transactions.

As Mr. Dimon talks through the various businesses and their prospects, he treats them very much as independent businesses – all dealing with distinct parts of our collective need for very different types of financial services. 

Investment banking is performing very well, presumably mostly because of trading activities (the details are not clear, but JPMorgan has a very high market share in OTC derivatives). 

The retail bank has become the number one provider of auto loans in the United States, while mortgages and credit cards are doing “really poorly”.  Credit losses overall are higher than expected, given the unemployment rate – consumers are not in good shape and the rising losses on prime mortgages (p.14) imply further trouble ahead.  Unemployment may fall in the second quarter of 2010, but – in Dimon’s view — it’s too early to say that the overall credit situation has done more than stabilize.

JPMorgan Chase continues to grow, including in credit card services, commercial banking, and asset management.  Mr. Dimon doesn’t say this, but the weakness of his competitors creates great opportunity to build an even bigger bank, with more market share and heftier political clout. 

His views on the pending legislative/regulation reforms are not in the slides, but from about the 21 minute mark in the webcast, he is quite candid. He doesn’t see major impact on his business from what is in the pipeline, e.g., any kind of progressive capital requirement that would force bigger banks to hold substantially more capital.  To the extent there is tougher consumer protection in new legislation, he says – rather bluntly – the consumer will pay the price, not JPMorgan.

Mr. Dimon insists, at minute 23, that we should “get rid of the concept of Too Big To Fail”, and he suggests that a new Resolution Authority – giving government more power to shut down or take over big banks – would make this possible.  Unfortunately, he glosses over the “international coordination” issues that make this impossible to achieve in the foreseeable future.

Overall, we are left with a big bank that is getting bigger.  It has been (relatively) well run by Mr. Dimon, but there are no assurances for the future.  Given that the “Resolution Authority” is at this point a mythical beast – with no potential effect on the problem of “Too Big To Fail” – we should worry a great deal.

We could set a hard size cap on banks like JPMorgan Chase (e.g., on assets relative to GDP), which could force them to find ways to spin-off businesses – and return to the much smaller and more manageable size of the early 1990s.  There is no evidence this would be disruptive or cause any economic difficulties.  But, for political reasons, this won’t happen any time soon – the size and power of banks like JPMorgan is put to good use on Capitol Hill.

Massive financial collapses do not emerge unheralded from periods of economic stagnation.  They are preceded by great booms, including rapid expansions of “successful” banks.

By Simon Johnson

A slightly edited version of this post appeared this morning on the NYT’s Economix; it is used here with permission.  If you would like to reproduce the entire post, please contact the New York Times.

42 responses to “Jamie Dimon Has Another Good Year

  1. Let’s see: profits are great, but lending is slack, credit losses are mounting on credit cards, car loans, mortgage loans, industrial loans. What does that leave? Trading? Hedge fund lending? Speculation on the dollar carry trade? Derivative bets? Reg arbitrage? Tax evasion? Marketing CDOs to pension funds and municipalities and high net worth individuals?

    Why are we supporting these sharks with bailouts and insured deposits?

  2. Of course. I mean, who didn’t have a good year, really?

  3. Rate spread – for all intents and purposes, the “real” rate is very high. Hence, the defaults are high too…

    But from the bankers’ perspective, the goal is to influence public policy to set a real interest rate that optimizes profit subject to the two competing objectives. To that extent, they only care about unemployment and low economic activity to the degree it causes loan default. The real interest rate that solves this optimization problem is going to be higher than the optimal real interest rate that solves the nation’s tradeoff between unemployment and inflation – particularly since poor capacity utilization keeps their costs of borrowing low (and the spread high).

    Let me put it this way:

    Banks are by definition LONG on MONEY, and that makes them SHORT on EVERYTHING ELSE.

    The rate spread subsidy is vastly larger than the TARP subsidy – but largely invisible. The cost of the rate spread subsidy is manifest in the size of the US deficit, but because it’s less direct and tangible, people blame the deficit not the rate spread.

    The great irony is that the same people who viciously argue against TARP also argue to keep this rate spread (real interest rates) high, and hence unemployment and low capacity utilization high as well.

    The second great irony, is that any attempt to really fix regulation (which WILL slow down money velocity, or at least prevent it from re-accelerating) without injecting _permanent_ new base money is to cause the economy to retrench, which is likely to cause citizens to blame the regulation; indeed, that’s already happening.

    Any pro-regulation individual who is against monetary easing to keep the economy running while debt contracts is not really pro-regulation; they are merely setting up the regulation to fail.

    Cheers…

  4. The great irony is that the same people who viciously argue against TARP also argue to keep this rate spread (real interest rates) high

    Can you provide a reference to someone — anyone — who has argued against TARP but also says, “We need to keep real interest rates high”?

    I suspect nobody actually said that, and what you mean is that somebody advocated something which, in your opinion, would result in high real interest rates. But I do not know, so please explain.

    Also, what is your policy prescription to eliminate the “rate spread subsidy”? Should we have the Fed raise the overnight rate to 2% and buy 10-year Treasuries until they yield 2.25%? That would certainly reduce the spread…

  5. this is either very brilliant or complete nonsense; i wish i could tell which

  6. Nemo, the example you gave in your hypothetical would be deflationary, and I’m pretty sure StatsGuy is in favor of an inflationary policy to narrow the spread. My understanding of what StatsGuy is arguing for is, ala Scott Sumner, an NGDP target of somewhere between 4-6%. Supposedly this can be accomplished through unorthodox monetary policy (aka quantitative easing) like exchanging various securities banks hold for cash. At least that’s what I get from reading Scott Sumner’s blog for the past month or so, but I’m a little dense so maybe I’m misunderstanding some things. Personally, I’m skeptical of using a purely monetary policy like this because it seems like we’re just handing over wads of cash to bankers. That’s why StatsGuy has advocated a mix of fiscal spending to go along with monetary easing in a number of places. The part of me that teaches economics to high school kids says this seems pretty reasonable, but another part of me just wants to say to h*ll with it, s*rew the bankers.

  7. Putting a cap on JP Morgan, that would be putting a cap on Jamie Dimon, the “friend” of the Nobel Peace Prize Obama. But our Lords are never big enough, their infallible glory reflect upon us…

    BTW, JP Morgan, long, long ago, used to finance the party of the German Chancellor, AH, and his policies. Evil and Too Big To Fault did not appear yesterday…

  8. Far-fetched, maybe not… Public Campaigns are the very life bloods that Jamie Dimon and the rest of the TBTF folks have invested all they have to these efforts. The comments that, “Mr. Dimon’s remarks were informative at two levels: how JP Morgan Chase operates, moving forward; and how that reflects the likely outlook for the US economy… According to Mr. Dimon, JP Morgan Chase has six ‘Standalone pieces” (Johnson).

    The problem with Jamie Dimon and many of the other heads of these financial institutions comes in to their inability to assess the true measure of risk. Risk as seen unfolding to the debt notes not being able to be paid – and/or to large now to be able to be written right off the books.

    The fact of the domino effect is being seen with the Emirates and other states and countries being downgraded by Moody’s and Fitch; as these agencies have triggered the concerns of alert for even the largest of mutual funds of PIMCO and Bill Gross.

    The other day, Meredith Whitney had delivered a convincing blow to the hidden fallout of the TBTF folks with again supporting her industry downgrades that had XLF and GS, BAC, PNC, C, WFC, MS, and JPM with 25-35% reductions from their current intrinsic values as traded as of 12/08/2009.

    These downgrades were based on these intuitions unable to make money the old fashion way, through good new credit issued loans and upon a metric of credit worthiness of the States underfunded and at high risk for their credit default ratings to be brought from AA+ to now C. This along with the countries having their ratings reduced from Triple A to AA+ or even lower has signaled a serious undertone of high risk to the likes of Bill Gross of the PIMCO Bond funds. PIMCO Bill Gross now calling for the dollar to go downwards again to hope it will save them from major losses.

    This does not mean to invest in equities again, but to look at the treasuries and the dollar as the harbinger of parking the safe bet for the current environments presenting themselves.

    These correlations remain critical to understand the call that was made by Bill Gross. This call can be read from an article out of Bloomberg from 12/09/2009.

    The real question that was raised by such a statement comes from how deep the Bond funds are entrenched in what was highly insured debt interments and the risk that has just come knocking at the door. When the likes of Bill Gross and The PIMCO funds need to unravel the debt slide sounds the alarms for the continued carry trade played by the TBTF folks as high risk bets against a double dip recession.

    The problem with the carry trade is paramount, as it has created the downfall for the Asian Rim and many of the other emerging economies needing a stronger dollar to emerge to support their sustainable recovery.

    This is seen in the YEN vs. Dollar, and the YUAN vs. world exchange rates. The world down under is an enigma that cannot support a world recovery and as such, they fuel the further pressures of building a greater bubble from the carry trade theory.

    When Mr. Simon commented to, “Mr. Dimon insists, at minute 23, that we should “get rid of the concept of Too Big To Fail”, and he suggests that a new Resolution Authority – giving government more power to shut down or take over big banks – would make this possible. Unfortunately, he glosses over the “International Coordination” issues that make this impossible to achieve in the foreseeable future” (Johnson).

    The answer that followed given by Mr. Johnson was incredible direct and to point to ensure the central foundations of a sound financial banking system. A banking system based on the delivery of a well-capitalized lending institution. A systems of “hard size cap on banks like JP Morgan Chase, which could force them to find ways to spin-off businesses – and return to the much smaller and more manageable size of the early 1990s” (Johnson).

    This same theme would be the perfect script of the foundations to protect the American Tax payers with the safety of insurance that the banking institutions are not using high-risk efforts to make their quarterly numbers for their shareholders and their end of year bonuses. Mr. Bernanke would once again be able to provide the true sources of credit and proper risk for capitalization protecting the American public from ever having to go down this road of falling off the cliff into the abyss and opening the floodgates of the printing press of untold amount of infused liquidity into the open markets.

    Thank you Simon for helping this student of finance and management assemble the vast universe of getting the Yin-Yang. The pressures of the use of the carry trade at the current moment in time have put even a greater amount of pressures that have weighted and built even greater bubbles signaling the future horizon even a greater collapse – if we do not try to bring it back into a harmony of balances.

    Far-fetched, Maybe not as we all need to fight for reforms that take our banking system back from the abyss of to arrogant to be regulated to a much more manageable size consistent with that of yourself, Paul Volker, Robert Reich and the list just keeps growing…

    The themes of Far-fetched were given by taken a class with a professor that taught that it is in the proving that fiction becomes reality.

    Google or use any of the search engines to review other thoughts on these matters by typing in James Gornick far-fetched.

  9. Sorry Nemo, I didn’t really read your post carefully. The first part of your suggestion, raising the overnight rate would be deflationary, but the second part, purchasing long-term bonds, would be inflationary. Together they would definitely narrow the interest rate spread bankers are taking advantage of. I’d suspect StatsGuy would be more in favor of the latter than the former.

  10. Well lightning does often strike twice or more times.

  11. I’m just in marketing so what do I know. But in answer to this…

    Can you provide a reference to someone — anyone — who has argued against TARP but also says, “We need to keep real interest rates high”?

    I would say isn’t this the whole platform of the Teabaggers?

    Not necessarily that they said verbatim to keep real interest rates high but to defend King Dollar which is the same thing?

  12. I think Scott Sumner must have some special kind of hypnotizing power over StatsGuy. Under Sumner’s hypnosis certain parts of StatsGuy’s normally well functioning brain are induced to inactivity under Sumner’s command. He seems to think after the Fed has lowered rates for the umpteenth time, haven’t raised rates in literally years, the Discount Window (which affects the fed funds rate and basically all other rates) is now at basically 0% and the Fed pumped God knows how much money into the system, StatsGuy sits there and says the policy is deflationary.

    I think generally StatsGuy is smart enough, but I have to say, on this one issue he’s not showing much intelligence. Here is Mike Shedlock’s analysis of it. I doubt 95% of economists or people looking objectively at the situation would disagree.

    http://globaleconomicanalysis.blogspot.com/2009/04/bernankes-deflation-preventing.html

  13. Ted K,

    Paul Krugman basically agrees with Scott Sumner–see here:

    http://krugman.blogs.nytimes.com/2009/11/13/its-the-stupidity-economy/

    The most important point of the piece by Mike Shedlock you linked to is point two: “Increase the number of dollars in circulation, or CREDIBLY threaten to do so.” (emphasis mine; sorry for the caps, I don’t know how to italicize here)

    Sumner, Krugman, and probably StatsGuy would argue that the Feds attempts to create inflation so far have not been credible. Whether or not that’s correct is beyond my pay grade. Although, Krugman’s analysis of Japan’s lost decade seems to indicate that altering inflation expectations is more difficult than one would think. I would also point out that the federal funds rate is a measure of nominal interest rates. Sumner and StatsGuy’s point is that REAL interest rates are too high. Therefore, you all are pretty much talking past each other here. One last thing. I hate to criticize, but your tone here strikes me as a bit condescending. StatsGuy seems to be an incredibly intelligent fellow, and while he is certainly putting forth an unorthodox point of view in my opinion he has certainly earned the right to do so without nastiness.

  14. Although I’m primarily directing my arguments against those who simultaneously wish to end TARP and enact policies that have the side effect of keeping interest rates high, there is a very large faction of have directly stated they want high rates for their own sake (e.g. strong dollar).

    Consider, for example, Ron Paul…

    http://www.cnbc.com/id/32881898

    It is a strange world in which this faction is commanding more legitimacy from the popular press than the Scholarly Consensus that Kling speaks of (and argues against).

  15. NKlein has summarized the issues quite well.

    Although I agree with Sumner on may points (NGDP targeting being primary), I find myself arguing with him on many others – notably the importance of international finance, currency exchange rates, need for long term infrastructure investment, and importance of regulatory institutions. However, though Sumner leans right (in a libertarian sense), he’s quite pragmatic, and persuadable with enough data.

  16. I statement that from Ben Bernanke that the feds target inflation rate was raised from 2% to 3% may help to raise expectations and counter deflationary tendencies. The idea being to show that the Fed will not be pulling the trigger on raising rates anytime soon.

    The problem is that the Fed rate is near zero, in order to bring unemployment down and spur the economy it needs to be at about -6% by Taylor rule. Since paying banks interest to take money from the Fed would be politically unpopular (think teabaggers and ALL taxpayers) the Fed might work at closing the spread as Stats Guy suggested as an alternative.

  17. As to “A good year”. Enjoyed the movie, but loved the book. If only more investment bankers could be put out to pasture in vineyards. Actually creating something has a wonderful feel to it; be it wine or widgets.

  18. According to Mr. Dimon, JP Morgan Chase has 6 “standalone pieces”: Investment Bank, Retail Financial Services, Card Services, Commercial Banking, Treasury and Security Services, Asset Management (p.3 of his slides). These businesses help each other, although Mr. Dimon was studiously vague about exactly how.

    In fact, there is nothing concrete about synergies or economies of scope in the slides. In his oral presentation, Mr. Dimon makes some high level remarks about “business flows and fees” but the exact meaning is unclear. For example, presumably clients of the Asset Management business get the best possible pricing if they buy or sell over-the-counter (OTC) derivatives through the Investment Bank. But then what exactly is the advantage to the client of having these two businesses owned by the same company? There’s always more transparency in arms-length transactions.

    So everyone except Dimon and his minions would be better off splitting this thing in six.

  19. “To the extent there is tougher consumer protection in new legislation, he says – rather bluntly – the consumer will pay the price, not JPMorgan.”

    That is my favorite part. Ya gotta luv the way that DC looks out for the little guy…new fees, new taxes, bigger deficits, but at least we may get “Free” healthcare.

  20. Yeah, splitting bonuses six ways would make for slim pickens. After all, what can a guy do with only a few paltry million a year?

  21. Quick question that I perhaps missed the answer to at some point: If they spent the whole year on the public dole using public money to cruise to massive profits, but before the end of the year they pay it back, they’re not subject to TARP restrictions on executive bonuses for ANY portion of that year. That’s why BoA paid back with the timing that they did, correct?

  22. I would argue again that it is critical to document the cost of the explicit and implicit subsidies to the financial sector. This is difficult because the subsidies are indirect, disguised as loans, and often secret in the case of the Federal Reserve.

    Most of the subsidies are in the form of explicit or implicit loans by the US Treasury (e.g. TARP) and the Federal Reserve. Depending on whether the loans are actually paid back, rolled over or not, and other variations, the subsidy can be anywhere from the full face value of the “loan”, e.g. the $700 billion in TARP money, to a smaller figure in the tens of billions.

    There are probably trillions of dollars in mortgage backed securities somewhere, either at the banks or the Federal Reserve, that are valued based on inflated housing bubble prices and will never return more than 50% of their face value (if that).
    Consequently, at some point, someone will eventually have to write off these failed mortgages and absorb the cost.

    What is needed therefore is a detailed accounting of the mortgages and the associated mortgage backed securities. How many of these securities are now on the books of the Federal Reserve through its murky, unaudited special “facilities”?

    It is unlikely that opponents of the huge subsidies to the financial sector will be able to marshall the support of much of the business community, general public, and so forth without clearly identifying the huge hidden cost represented by these “assets”.

    One ought to be able to find public records of mortgage holders and their amounts as well as compare the mortgage face values to the current value of the houses, especially in hard hit areas like Northern and Southern California. There are huge developments that were built during the boom and which must represent billions of dollars in mortgages per development or per real estate development firm. Who is actually holding the now under water mortgages? The mortgage backed securities must be tied somehow to some kind of holding company or other cut out that is the mortgage holder in legal records. And who ultimately now “owns” the mortgage backed securities: the giant banks, the Federal Reserve, the US Treasury, Fannie Mae/Freddie Mac???

    I would argue that, with the exception of Dean Baker, most economists and financial analysts critical of the subsidy policies have not made much attempt to document the actual costs.

    A full public audit of the Federal Reserve would clearly be helpful.

    John

  23. Warren Buffet said you should try to invest in companies that can be run by idiots since sooner or later an idiot will run the company you’ve invested in. Even though Mr. Dimon seems to have had a good year I suspect JP Morgan’s time is coming. The Republican theory of running the country seems to be that it is much preferable for private enterprise to ruin the country and the middle class than to ever allow that some regulation is useful.

  24. Every mortgage backed security carried on the books of the Federal Reserve Banks is carried at principal outstanding plus accrued interest. This is explicitly explained in the footnote every week.

    I follow the FRB Balance Sheet weekly as an accountant. The consideration for the outright purchase of these assets is an increase in the demand deposit account of the member bank that sold the mortgage backed security it’s Federal Reserve Bank. It is patently obvious that these purchases were at par, the amount carried on the FRB’s books at inception less subsequent billings of interest and subsequent collections of interest and principal. Since these assets are 100 % guaranteed by Freddie, Fannie and Ginnie , any defaults were recourse billed against Fannie et.al. and presumably collected.

    The Federal Reserve Banks already are audited and receive a full opinion. The FRB NY audit report is on line at the FRB NY website.

    Member bank reserve deposit accounts until after August 2008 were always virtually nil in terms of value. The average balance for all reserve demand deposits of member banks and primary dealers was less than $7 bn on a balance sheet asset footing of around $900 bn.

    This week, total member bank and primary dealer reserve demand deposit accounts at the FRB’s aggregate over $1 trillion. A weekly comparison shows these increases in reserve accounts due to buying mortgage backed securities were never brought down. In short, the demand deposit funds are ” effectively” frozen. except for a small marginal value layer.

    Ask yourself, ” What property will the member bank receive if the member bank draws down his deposit account to zero as routinely done for the entire history if the Federal Reserve before September 2008?”.

    The only answer to that question is currency if more than a few take down their account unless the deposit is credited to the Treasury at the FRB NY to redeem TARP investments. The only other methodology is to force the FRB to sell Treasuries, Agencies and Mortgage Backed Securities to generate incoming regular banking proceeds to cover deposit withdrawls of member banks. Obviously, the FRB’s are highly limited in selling Treasuries and consequently a liquidation of reserve accounts to traditional levels would require the FRB to sell mortgage backed securities at par. Substantially all of the FRB profits escheat to the Treasury. Consequently , any loss on sale of MBS’s would need to be made good by the Treasury or the FRB’s would be insolvent… that is equity would be diminished or extinguished.

    Just think of the mark down reserves of the selling banks being freed up with $800 bn of mortgage backed securities sold to the FRB’s at par.

    Also, these transactions are all included in the current year that will require full certified financial statements. That is a future event.

    The answer is that the FRB’s own over $800 bn of Fannie, Freddie and Ginny guaranteed MBS’s which were purchased at 100 plus accrued interest. That is, unless the FRB’s bought these assets at market and marked up the assets to par plus accrued interest and credited the US Treasury for the gain. That seems quite implausible from a policy perspective.

    But the FRB’s own these MBS’s outright and do carry them at par. It is equally clear that every seller of these assets has not taken payment by drawing down their reserve account. These are the known facts.

  25. Ted,

    The Fed has been paying the banks interest to take their money and sit on it for quite some time now. See here:

    http://www.federalreserve.gov/monetarypolicy/20081006a.htm

    This policy pretty much reveals what a sham the whole “we need to save the banks so they will lend to consumers,” argument the Bush and Obama people have used to justify TARP. Brad DeLong calls what the Fed has been doing “credit easing,” as opposed to quantitative easing. Basically it’s the drop money out of helicopters metaphor, but instead of landing in a public space where it would presumably help the economy, it’s falling in bankers backyards and the government is paying them to hoard it. Moreover, the Fed has strongly indicated that it will suck all this money out of the economy by either raising interest rates or selling bonds at even the slightest hint of inflationary pressure. For the truly schizophrenic nature of the federal government’s policy response to the financial crisis see this post, again by Brad DeLong:

    http://www.theweek.com/bullpen/column/103601/The_wrong_jobs_summit

    Reading DeLong’s post again I’m at a loss for words. Infuriating doesn’t even begin to describe the complete ineptness of how our government has handled this crisis.

  26. Ted, I had forgotten to note – after following the link – that the US has not engaged in true QE (at least not to any quantifiable degree). Even leaving the very modest quantity aside, Brad DeLong accurately differentiates between Quantitative Easing and Credit Easing, the difference being the declared/expected permanence of the newly created money.

    Frankly, it’s inconceivable the Fed can’t create inflation, which means that the reason we don’t have inflation is because they don’t want it. Period.
    Or, in the words of Hamilton (at Econbrowser): “If the Fed can’t create some inflation, let me try.”

    When the Fed says “We’ve done all we can,” what they really mean is “we’ve done all we want, and if we convince everyone we can’t do any more, maybe they won’t ask us to try…”

    With RGDP low, if we were to stabilize nominal growth (or even recovery lost price levels) we’d run monetary policy to achieve 4-5% inflation for 2-3 years. This is what EVERY conventional macro person expected back in 08; What EVERY conventional macro model indicated. Remember when Warren Buffet back in 2008 stated “inflation is coming, it’s the only way out”? Well, it’s the only way out (other than catastrophe), but it isn’t coming…

    Clearly, over a year later, we still haven’t gotten inflation expectations above 2%, and have had year over year declines (the ONLY drop in NGDP since 1938).

    So I end with this:

    1) It’s inconceivable we can’t generate inflation; I assure you, I could do it rather easily if I were running the Fed

    2) Thus, the reason we don’t have a return to the nominal price/growth trajectory is because we haven’t used monetary action aggressively enough to achieve it

    3) So, how can one say that monetary stimulus has failed when clearly _it has not been tried_???

    (And isn’t it strange for a Cato-libertarian like Sumner, progressives like DeLong and Krugman, and even esteemed centrists like Joe Gagnon agree… Yet we can’t get the political will to what is necessary?)

  27. CBS from the West

    “Free” healthcare? What are you talking about?

    The subsidies for forced purchase of private health insurance are meager. To get it seemingly “free” you basically still have to be destitute. If you make enough income to support yourself, they’re going to make you shell out some of it. And if you’re one of those high fliers who makes, say $60,000 a year, be prepared to hand over 12% of that for your “free” health insurance.

    What’s that you say? You won’t be able to afford housing and food? Well, I guess you can solve that with your health insurance if you can figure out how to malinger your way into a hospital for some intravenous alimentation.

    This health care “reform” is an even bigger scam than the proposals for financial reform.

  28. StatsGuy —

    5-year inflation swaps (and shorter maturities) turned negative last fall. Do you not think the normalization to 2% had anything to do with the Fed purchasing $2 trillion in MBS/Agencies/Treasuries?

    Year-over-year numbers are misleading at this point because there was a huge shock 9-12 months ago. For the past few months, CPI and GDP have been increasing. I think you need to be more careful not to confuse levels with rates of change.

    Similar comments apply to the connection between the strength of the currency and interest rates. The latter depends on the rate of change, not the level, of the former.

    The situation with real interest rates is even more complicated. It is not at all obvious (to me, anyway) that a weakening currency implies lower real interest rates. Do investors really not care about the real return on their money? Will they not demand a higher nominal return if they perceive the currency is being trashed? This is what the Paulians are worried about. (Note: I am not saying I agree with them.)

    Like you, I think it is unlikely the Fed has perfectly threaded the needle. Unlike you, I do not think it is at all obvious (yet) in which direction they have erred.

  29. Jamie Dimon may be having a superlative year at JPM but without their unknown total sales of mortgage backed securities to the FRBNY, their cash and equivalents would get close to disappearing compared to December 31, 2007. These are cash and short term assets lumped together. At the end of 2007 the total of both was $714bn. At the end of 2008 before MBS’s were purchased by the FRBNY the JPM cash and short term investments was $368 bn. As of September 30,2009 the total was $252bn

    Another thing we do not know is how much of the $854 bn of mortgage backed securities bought by the FRB’s were bought via intercompany transactions of bank groups by the subsidiary National Association that has the Reserve Demand Deposit Account at their FRB? No audit of the FRB would disclose this because the transactions are at the banks and not transactions of the FRB. Congress could easily secure this data by asking the top hundred banks for specifics. Subpoena if needed.

    As of last night the FRBNY had purchased mortgage backed securities totaling $334 bn. How much came from JPM? It must have been substantial. Say 10 % just for fun. At 10 %, the total cash and equivalents would have been $33 bn less at September 30, 2009. What if the real percentage is 25 % or $83 bn as of last night?

    Going from $714 bn to $219bn in 21 months with my little 10 % guess is some massive erosion of cash reserves. Remember too that this total includes vault cash too!

    Now how much of the foregoing totals are just the bank itself? The National Association to be clear about it.

    If you really want to get scared compare the total cash position of the member banks published aggregations in Table 8 every week against known totals of member bank depositary reserves on the balance sheet of the FRB’s plus vault cash against total cash assets in Table 8. It looks very impressive until you realize the balances cannot be taken down very much. Almost nothing in my view other than as currency in a non currency economy. Ask yourself. How much income do I get as currency? What are my total payouts in currency? Is it 5 %. Do the banks now make loans to a corporation by sending out currency in an armored truck? Just kidding.

    Like all the other big banks JPM ” effectively” was subjected to a run in the fall of 2008.

  30. …still awesome.

    also, check this link, http://adjix.com/pfbn or http://ad.vu/pfbn

    full link at:

    http://tpmcafe.talkingpointsmemo.com/talk/blogs/miguelitoh2o/2009/12/goldman-sachs-and-the-great-o.php?ref=reccafe

    Looks like the President finally capitulated, and gave into the healthcare corporatists DINOs (with the help of the spineless Maj Sen Leader Harry Reid)]. If this debate is any indication of how financial reform would be debated and enacted, it may really be hopeless…. I had asked a rhetorical question to Paul Krugman, asking why he had not been made a part of President Obama’s inner circle of senior economic advisors back during the transition team etc. And recently also read or heard somewhere that even Paul Voker is being marginalized.

  31. So, I gather that Mr. Dimon doesn’t believe in taking a critical look at our country’s “real” economy. That it, the economy which we experience every day. His experience is chauffered, butlered and maided, managed for him by peons, so that he can pay attention to the big picture and doesn’t get caught up in the minutia of the real world, which would distract him from his participation in the FED’s Dollars for Doughnut Holes program, that keeps buying up what he generates or can’t lay off in hedges, and so he doesn’t have to worry about the poor performance of credit cards and mortgages in their portfolios (these are hedged by government guarantees).

    Well, Mr. Dimon, don’t worry, nothing will happen until you and the other TBTF’s vanish is the puff of smoke rising from the crash that’s coming. Because you and the rest of the Magnificent Seven are really and truly the only one’s who are benefitting from our current economic state (save a few health care and energy oligarchs).

  32. The Fed is not paying for loans to the banks nor are the banks paying interest to customers procuring loans.

    It would be nice to have a slight hint of inflation instead of deflation at this time. With the Fed target, even at 2%, for inflation we should be a long term before there is any monetary tightening.

    What seems to have happened is the ending of monetary stimulus at this time. I do like Brad DeLong’s idea of getting the two protagonists/antagonists to agree on which we should and should not do to stimulate the economy. By stimulating the economy I mean creating jobs and not pushing paper to build bigger bonuses and campaign contributions.

  33. Nemo and Paul Volcker Co-Chairmen Federal Reserve 2013. Nemo gets the larger office and better window view. Nothing but blue skies. Get your cheap U.S. equities now while you still can.

  34. Nemo,

    Yes, I applaud the Fed interventions on MBS, Treasuries, Agencies, and wish they had done more, done it a little sooner. And been more clear about duration and targets.

    Thank you for calling attention to the rate/level issue… the advantage of a level target vs. a rate target is the ability to make up lost ground – in other words to restore a prior price level trajectory. Not necessarily an _asset_ price trajectory (clearly not sustainable), but a core price trajectory. My guess is that doing so would help banks far more than TARP, by reducing their losses in the _first_ place (fewer defaults, higher resale prices). Instead, we’ve kept real interest rates overly high, and subsidized losses to banks directly (TARP, prevferred credit while small business starves, etc.) using taxpayer funds which _could_ have gone toward other discretionary programs. (We compare a few hundred billion to the federal budget and it’s small; but if you compare it to the discretionary component, it’s huge…)

    I think we have some strong evidence that the Fed has undershot vs. overshot – the state of the economy/unemployment is exhibit 1, but many would blame that on other things.

    The yield curve is exhibit 2… In the middle of a cyclical contraction, the _last_ thing the Fed wants is a yield curve that suggests mild disinflation in the short run and default risk in the long run.

    http://www.ustreas.gov/offices/domestic-finance/debt-management/interest-rate/yield_historical.shtml

    Observe the long/short spread from January till today

    Go to previous years – how far do you have to go back to see a 30 year/3 month spread like that?

    http://www.ustreas.gov/offices/domestic-finance/debt-management/interest-rate/yield_historical_main.shtml

    The Conventional wisdom for this sharpening is to blame the Fed (how dare they print any money). Quite the contrary, the reason the curve is SHARP (e.g. strong inflection) is because the Fed is doing everything it can short-term to keep the dollar strong, at the cost of perceived future weakening of the dollar. It is the next phase of selling-out the future to maintain our strong-dollar debt-funded consumption.

    If that is not true, how would you interpret the message the bond market is sending us?

  35. FYI

    New NBER study on the viability of inflsting the National debt away:

    But there are also reasons why trying to inflate the debt away might not be viable now. The research says the balance between who holds the debt and its
    maturity is important. Whereas the fact that moreforeigners hold government debt can make it more attractive to inflate your way to a lower debt burden, the shorter maturity of the debt makes it a more expensive proposition over the longer run to do it.
    Ultimately, it’s a risky strategy, the paper warns. It notes that there is a decent chance that “modest” inflation can give way to the double-digit
    percentage inflation that is painful to contain. In the current environment, the U.S. would also run the chance of making foreign creditors angry, and it could also exacerbate the move away from the dollar as the world’s chief reserve currency.

    http://blogs.wsj.com/economics/2009/12/10/paper-probes-fed-nightmare-inflating-away-us-debt

  36. FWM, thanks, I will read that. I’ve commented on the issue of the Fed needing to lengthen average maturities to gain monetary flexibility (after the Bush II treasury shortened the cycle to hide the cost of their deficits, effectively buying lower rates at the hidden cost of absorbing risk) here:

    http://blogsandwikis.bentley.edu/themoneyillusion/?p=2914#comment-9862

    citing

    http://www.bloomberg.com/apps/news?pid=20601087&sid=aAdzT9vobEDw&pos=7

    Due to roll-over of debt, that maturity extension process is not due to end till 3-4 more years, suggesting that this is when the Fed will inflate. Interestingly, this was pretty closely predicted by the ~5 year cliff in bond rates (which has actually softened a bit in the past month)…

    Until then, you could be right – that could be the reason the Fed is aiming for the short side of 2% price growth, even though we should be on the other side of that mark.

    I still side with Joe Gagnon here, and now Krugman this morning – the Fed needs to do more.

  37. Reducing the size of big banks “won’t happen any time soon – the size and power of banks like JPMorgan is put to good use on Capitol Hill.” Other hurdles include:

    National governments are reluctant to make changes that might put their home financial centres at a competitive disadvantage. Bankers use that to their advantage.

  38. Big banks wan’t to be regulated, but not too much. With regulation banks have the benefits of the U.S. government safety net – deposit insurance, access to Federal Reserve loans (discount window), implicit subsidies and lower borrowing costs, and of course bailouts.

  39. crocodilechuck

    rapid bank growth: just look at RBS (and what happened to IT)

  40. It’s not even necessary to set a “hard cap” on the size of banks, with rolling back the Financial Modernization Act (which practically rolled back the crux of Glass-Steagall and made it possible to have the mega-banking houses that we now have) banks will likely shrink back to the more manageable size that we had almost two decades ago.

  41. It never ceases to amaze me how in the current economic crisis the institutions that are largely responsible still seem to come out profiting. I like the idea of trying to force these companies to assist in spinning-off smaller companies. Sounds like a good plan to me.