There’s been a lot of clucking in the news media and blogosphere about the need for tighter banking and securities laws, presumably in the wake of the revelation of JPM’s $2 billion losses. I’m in no position to know whether we should be concerned about JPM’s losses. I would prefer it that only JPM shareholders be interested in JPM’s profits or losses but as long as big banks are deemed to be too big to be allowed to fail I don’t think I’ll have my way about that.
However, I did want to weigh in on the need for more regulation. I don’t think we need more regulations; I think we need more enforcement of the existing regulations and the perception that the regulations that are in place will be enforced. Let me give some examples of how, at the very least, we’re sending the wrong signals.
When the president of the New York Federal Reserve, the functionary most responsible for ensuring the stability of New York banks is appointed Secretary of the Treasury immediately following the revelation that big New York banks are teetering on the brink of collapse, that’s a very bad signal.
When the former director of the SEC’s Division of Enforcement on leaving the department goes to work for a large securities company, that’s a very bad signal.
When his successor on leaving the department goes to work for a large DC law firm specializing in defending clients against SEC enforcement actions, that’s a very bad signal.
And when presidential economic advisors after leaving the government go to work for big banks, that’s a very bad signal, too.
As long as the incentives for lax enforcement remain high, don’t expect more laws to produce a sounder system.