Inside Financial Services

Rulemakers at the Fed Need to Come Out of Their Ivory Tower

Jamie Dimon asks Ben Bernank a few questions--and gets some dispiriting answers

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As I told Betty Liu on Bloomberg TV this morning, Jamie Dimon is my hero!

“Has anyone bothered to study the cumulative effect of all [the new Dodd-Frank-mandated rules and regulations the Fed is heaping on the banking industry]?” Jamie asked Ben Bernanke in Atlanta yesterday, “And do you have a fear, like I do, that when we look back and look at them?…? they will be a reason that it took so long that our banks, our credit, our businesses, and most importantly, job creation started going again?”

A reasonable question! And coming from Jamie, one that invites a special level of candor. Bernanke’s answer was astonishing. The FT reports:

Mr Bernanke replied: “I can’t pretend that anybody really has. .?.?. We don’t really have the quantitative tools to do that.” But the Fed was trying to produce rules that “do not unnecessarily impose costs or unnecessarily constrict credit”, he said.

Heaven help me if I’m tempted to wonder whether Ron Paul might be on to something, after all. Did the chairman of the Federal Reserve really say that the central bank of the greatest economic power on earth “doesn’t really have the quantitative tools” to estimate what the real-world economic effects of it recent orgy of rulemaking might be? And that he “can’t pretend that anybody” at the Fed has even tried?

As I say, astonishing. You’ll give me no argument, I assume, if I venture the view that the Federal Reserve is a very big bank. It’s even bigger than the lesser lights in the private sector that it oversees, such as, say, Goldman Sachs, JPMorgan, Citigroup, and Bank of America. Yet the Goldmans and Morgans of the world have all sorts of quantitative modeling tools at their disposal, and the intellectual firepower to use them reasonably skillfully. The people at the Fed are just as smart and their computers are just as fast. And, if anything, they have access to lots, lots more data. Yet the Federal Reserve isn’t up to the same sort of quantitative effort?

This, unfortunately, explains a lot. First, there was the nutty swipe-card rule the Fed has put forward, that would turn the banking industry’s debit-card business into a money-losing public utility. Then this past weekend came Fed governor Dan Tarullo’s crazy idea that big banks might have to carry capital ratios of as high as 14%. That would essentially make large American banks obsolete. Based on what Bernanke told Jamie yesterday, the regulators at the Fed persist in coming up with crazy rules like this because they simply haven’t given the matter a whole lot of thought. Wonderful.

Ideas and proposals like the ones the Fed has promulgated lately will have the effect of weakening the country’s banking system, not strengthening it. One might have thought that the people at the Fed would have taken such real-world implications of their rulemaking into account. But they apparently haven’t. This is not encouraging.

What do you think? Let me know!

9 Responses to “Rulemakers at the Fed Need to Come Out of Their Ivory Tower”

  1. Canadian

    Tom, If the public knew a fraction of the crap that the big banks have heeped on the rest of the world, they would not demand additional regulations but would likely storm Wall Street with pitchforks. These institutions cannot regulate themselves and are a danger to us all. Please dont tell me that the price of oil and wheat, corn, food has been skyrocketing because of drought conditions in western Australia or whatever. In 2008, Goldman and Morgan Stanley controlled 11.6 billion bushels of wheat through commodity index funds, swaps, etc. Meanwhile, millions crossed the poverty line. When will this madness end. I would like to start a new AIDS vaccine ETF fund. I will become rich. I wont deny them the product, I will just sit on it for a while until they get really desperate and will pay a much higher price for the product. If you want in let me know.

  2. Blame Canada

    Who let in the Canadian? I thought they didn’t have a first amendment? Could we restrain his speech because we should not have to witness such horrible logic that it doesn’t merit a response.

  3. jk

    just bad ………. they think the banks have a wizard Oz.. running them ..not real people with all kinds of roles… just dumb

  4. DLB

    Of course the Fed doesn’t have the tools to know the impacts of their actions. Nobody does. At least he admitted it for a change. And as for the regulations, of course they are stupid and counter productive but that’s what happens to an industry that puts itself in a position (by making huge, highly concentrated mortgage and derivative bets) that require the Federal goverment to bail them out. As I noted in comments here a couple of years ago, much higher capital requirements turning large banks into utility investments are now inevitable. Read your history from the 1930′s. Maybe in a decade or two, after these companies see it’s in their interests to breakup we can get back to less oversight and regulation.

  5. JB

    Bankers/banks need to start getting innovative and using their capital to get an edge and get moving instead of whining. This is the time to grab share–the whiners will be left in the dust

  6. Greg Price

    Looks like Jamie Dimon just replaced Bill Cooper as #1 on the Fed’s Hit List!!!

  7. Jim C

    My guess is that Jamie was expressing the frustration with all the impending regulation that is reducing the banks’ ability to earn PLUS the regulatory meddling that is going on behind the scenes each day inside the major instituions. We have seen it before. Regulators failed during the years prior to the last crisis. And now they are now going to ENSURE it never happens. Their likely approach to most things will be to JUST SAY NO, get another legal opionion, hire another risk manager, reduce risk etc. If Tim Long is the Chief OCC examiner it is likely that the OCC is overregulating and driving management of the major institutions crazy.

  8. littlecat

    to tom brown and his critics, i submit a brief one act play.
    characters: timmy, shebear and benjy
    scene: main bar, willard hotel, washington d.c.

    shebear: i am tired of talking about the economy. let’s talk about something else.
    timmy: i agree. my big initiative ( other than bankrupting the u.s). is our carbon footprint
    benjy: thats an easy problem to mitigate. lets just keep people from driving cars. that would reduce the carbon footprint overnight
    timmy: that’s a benefit, but wouldn’t the cost of that action be that people couldn’t drive to work
    benjy: you know timmy, we don’t have the tools for cost/benefit analysis here
    all: heee, heeee, heeee, let’s do it

  9. Furlong Baldwin

    It is an indisputable fact that Mercantile-Safe Deposit & Trust Company ran quite successfully for many decades with a ratio of equity-to-assets of 14%.

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