By Simon Johnson, April 1st, 2012
A major new research report – released this weekend by the renowned international consulting firm, IMS – finds conclusively that implementation of the proposed Volcker Rule would damage not just the irreplaceable Muppets but also “all children-oriented television or other media-based educational program content.”
The logic in the report is straightforward and, quite frankly, compelling. The Volcker Rule – which aims to limit proprietary trading and excessive risk-taking by the country’s largest banks – would reduce the ability of “too big to fail” institutions to bet heavily on the price of commodities used to produce puppets (mostly cotton, but also apparently wood, aluminum, and some rare earths.)
“In response to the changing demands of their customers, banks have expanded their role of providing financial resources and services to include risk management and intermediation services to [various kinds of puppets]” (p. ES2)
These services are highly profitable and of great value to the skilled artisans who produce puppets, but if the very biggest banks are not allowed to engage in these activities, then no one else will.
This, of course, is elementary economics – dating back as far as Adam Smith. If there is a profit-making opportunity to be had, then everyone will spurn it, unless they work for a massive international bank.
The history of the United States is replete with examples of business sectors that would never have come into existence were it not for the proprietary trading of banks that were large enough to damage the economy when they failed.
Thomas Edison worked long and hard for J.P. Morgan (the man) before being allowed into the speculative trading side of the business. Henry Ford’s entire model was a spin-off from Bankers’ Trust – with a substantial equity investment from his former employer. And the Wright Brothers’ business concept – as well as their most basic notions of aeronautics – derived from their early work with paper airplanes on the trading floor of what became First National City Bank of New York (i.e., Citigroup today).
Put simply, there has never been real entrepreneurship in the U.S. financial markets or economy – other than what these banks have put there, directly or indirectly. The fact these banks were very small relative to the economy until the 1980s is irrelevant.
And the fact that these banks now draw on huge government implicit subsidies – while also creating an enormous and dangerous tax payer liability – is neither here nor there. Malfeasance by these banks has brought us to the brink of fiscal disaster. In political terms, we are manipulated by bankers just as if they are pulling our strings.
But you have to consider the benefits, as well as the costs. Do you enjoy watching the Muppets or not?
If the Volcker Rule is implemented as planned, that would have a major negative effect on the bond yields – the spread over the “risk-free” interest rate – paid by the Muppets and other leading providers of children’s entertainment. No one else will ever trade these bonds to any significant degree – just as no one would have produced cars or planes without the dominance of big banks in those sectors. Even the electricity you are using to read this piece was made possible by the market dominance and overbearing presence of deeply entrepreneurial and ethical entities such as Enron.
The Muppets themselves have come out strongly in favor of the financial sector as currently structured.
“It’s not the dealers and it’s not the investment bankers and providers that have to grapple with regulation. It’s users and [puppets of all kinds] in the market that have to deal with different margin requirements…have to deal with unfortunately and inevitably higher cost in managing their portfolios…and have to pay the price for the higher cost of holding inventories.”
The IMS report was paid for by Morgan Stanley (see p. 3), further evidence of smart entrepreneurial investments by big banks that support the deeper development of the economy and help create puppets everywhere.