Bruce Judson

 

Recent Posts by Bruce Judson

  • Today's Banks Don't Do What Banks Are Supposed to Do

    Jun 27, 2012Bruce Judson

    Banks in a capitalist society are meant to create wealth and decrease risk. JPMorgan and its kind do the opposite.

    In his testimony before a congressional panel on the recent Swiss trading debacle, Jamie Dimon, CEO of JPMorgan Chase, said, “We’re doing what a bank is supposed to do.”

    Was Dimon correct? In a capitalist economy, was Chase doing “what a bank is supposed to do"?

    Banks in a capitalist society are meant to create wealth and decrease risk. JPMorgan and its kind do the opposite.

    In his testimony before a congressional panel on the recent Swiss trading debacle, Jamie Dimon, CEO of JPMorgan Chase, said, “We’re doing what a bank is supposed to do.”

    Was Dimon correct? In a capitalist economy, was Chase doing “what a bank is supposed to do"?

    The answer is assuredly no. A bank is not supposed to do what JPMorgan Chase and its fellow too-big-to-fail compatriots do every day. They are practicing something other than actual capitalism. As this column has consistently stated, capitalism is not a vague idea. It is an economic system with well-defined principles designed to create wealth for society. These principles have powered the creation of wealth in America since the nation’s founding and empowered our country with an extraordinary resilience.

    But importantly, wealth does not mean profits. Wealth is anything that can be experienced or physically used. Profits are an accounting proxy for the wealth that an entity generates. Like most proxies, the idea of profits as a measure of the wealth created for society may often be a good indicator, but as I have written previously, this proxy has failed spectacularly in the financial sector. The profits generated by today’s financial institutions bear little resemblance to the (lack of) wealth they have created for our society.

    Capitalism also means there is no such thing as a “free market.” All markets require rules in order to operate fairly. The word “regulation” is really just another term for the rules that govern how participants in a market must behave. Indeed, one modern example of a free market economy may have been the period of economic chaos in Russia that followed the collapse of the Soviet Union, when the absence of rules led in part to devastating results.

    Now let’s turn to the purpose of banks in a capitalist economy. Finance is an intermediary good: You cannot eat it, experience it, or physically use it. The purpose of finance is to support other activities in the economy. Banks are meant to allocate capital (funds) to the best possible use. In a capitalist economy, this means allocating money to the people or entities that will create the greatest wealth for the overall society. At the same time, risk management is supposedly a primary skill for bankers. When capital is allocated well and available to wealth creating entities, societies flourish. When capital is poorly allocated, economies can collapse.

    Speaking broadly, banks allocate capital in two ways: through loans and by facilitating investments. Indeed, as we read breathless news reports on the first-day performance of IPOs, it’s easy to forget that the central purpose of an initial public offering (IPO) is to channel investment money into an enterprise that will hopefully create wealth for our entire society.

    In light of today’s overly complex, overly concentrated, and overly influential financial sector, the above description may seem far too simplistic. But it's not. In Judaism, there is a well-known story of the famous Rabbi Hillel describing the essence of Judaism in a simple statement, and then saying “the rest is commentary.” The same holds true in today’s financial sector. All of finance is meant to allocate capital to the best use, the rest is commentary.

    Since capitalism is a system designed to create wealth for society, gambling is antithetical not for moral reasons but because no wealth is created. Gambling is a zero-sum game. In a heads I win, tails you lose transaction, it's impossible to create wealth.

    Now, let’s return to Jamie Dimon’s statement before Congress and reframe it. Was Chase “doing what banks are supposed to do”? 

    First, as numerous commentators have pointed out, Chase was trading to increase its profits. This type of trading is simply gambling by another name. The outcome has no impact on the larger wealth of our society. It had nothing to do with the purpose of banks in the economy. At the same time, many of the so-called brilliant financial innovations of the recent era are, in themselves, nothing more than hidden forms of gambling.

    Second, Chase was increasing rather than decreasing the risk associated with its banking functions. It has become blindingly obvious that in trading and creating complex financial instruments (also called weapons of mass destruction) our Masters of the Universe never fully understand the risks they are creating for their own institutions or our larger society.

    Mr. Dimon's idea of what banks are supposed to do does not exist within the principles that makes a capitalist economy function. 

    I do, however, have one question for him. I strongly suspect he would argue that the purpose of management decisions is to increase shareholder value. In 2011, the value of JPMorgan Chase’s stock price decreased by 20 percent, yet he was paid $23 million. Is this also what a bank is supposed to do?

    Bruce Judson is Entrepreneur-in-Residence at the Yale Entrepreneurial Institute and a former Senior Faculty Fellow at the Yale School of Management.

    Read more

    Share This

  • Americans Can't Afford a Tax on Mortgage Relief

    May 3, 2012Bruce Judson

    house-in-hands-150Failure to renew legislation that prevents mortgage debt relief from being counted as taxable income could destroy the fragile recovery.

    house-in-hands-150Failure to renew legislation that prevents mortgage debt relief from being counted as taxable income could destroy the fragile recovery.

    The economic crisis began with the housing crisis, and it will only end when the housing crisis also ends. Unfortunately, the evidence of the past five years suggests that the Obama administration and Congress have never actually understood this connection. Despite massive numbers of foreclosures, the loss of almost $7 trillion in housing wealth (over one-half the nation’s home equity), and even unprecedented pleas from the Chairman of the Federal Reserve, there has been a shocking paucity of innovation or even policy activity in the housing arena.

    Now there is a a very real chance that Congress will destroy the limited policies the Obama administration does have in place, prevent additional efforts, and further widen the gap between the haves and have-nots in America. Moreover, the net effect of this congressional failure could be to further undermine the weak housing market and risk sending the nation into another economic tailspin.

    The administration’s signature housing policy effort is now aimed at mortgage principal reductions. This effort is at the core of the multi-state robo-mortgage settlement and central to the administration’s criticism of Edward DeMarco, the acting director of the Federal Housing Finance Agency. From the perspective of many analysts, myself included, the administration is finally on the right track, but its efforts are far too minimal to make a meaningful difference. Indeed, the nation’s total negative equity (the amount of mortgage debt owed which exceeds the value of the underlying properties) is presently in the range of $700 billion, and it's likely to increase.

    Nonetheless, the administration’s principal reduction efforts are a step in the right direction. These efforts open the door for the far larger, far more creative efforts that will ultimately be needed to prevent millions of upcoming foreclosures and possibly massive walk-aways from the estimated 23 percent (and increasing) of all mortgage holders -- 11 million families -- who are underwater.

    Here’s the issue: As a general rule, any debt forgiveness is income. This means that if a home buyer borrows to buy a house and the bank forgives a portion of the loan, whether in a short sale, through debt reduction (i.e. the settlement), or even foreclosure in states that allow banks to officially choose not to seek recourse, a taxable event has occurred. The income earned is the difference between the original mortgage borrowed and the amount ultimately repaid to the bank.

    For example: A family borrows $300,000 for a mortgage. The home declines in value and the bank agrees to a short sale (where the sale price is for less than the amount of the homeowner’s mortgage debt) and receives a total pay-off of $200,000. The $100,000 difference between the amount borrowed and the amount ultimately paid back is the amount of the loan the bank has forgiven. This $100,000 is a type of principal reduction and generally subject to ordinary income taxes.

    However, at the start of the housing crisis in 2007, Congress enacted the Mortgage Forgiveness Debt Relief Act of 2007, which exempts precisely this phantom income from federal taxation. The term of the law was extended in 2008. But the current law expires at the end of 2012, and it is by no means clear that it will be extended. Moreover, the seeming lack of public discussion about the need to extend it is shocking.

    (There is a complex array of qualifying circumstances and exemptions surrounding this tax issue, including the laws of the individual state involved, the solvency of the homeowner, whether the homeowner is in bankruptcy, whether the sale involves a primary residence, refinancing associated with the property, and a variety of other factors related to qualifying for the federal exemption. In particular, short sales in nonrecourse states (which include California) are not considered debt forgiven and therefore, if no other income-generating activities apply, do not trigger federal taxes. But this post does not address the many nuances involved in these issues.)

    it’s virtually impossible to imagine that struggling families who are selling underwater homes at a large loss (and have already lost a large chunk of their life savings as the value of their home equity, including their down-payment, was vaporized in the housing crisis) will go forward with short sales. The vast majority of homeowners will not be able to afford the resulting tax debt. So one consequence of a failure to extend this law is likely to be an immediate end to the vast majority of short sales, which have been increasing rapidly. Short sales constituted an estimated 24 percent of all January 2012 home sales and surpassed the estimated 20 percent of all January sales comprised of foreclosed homes.

    For the same reasons, all efforts at principal reduction will be stopped cold at the end of this year. Homeowners who are struggling to meet their monthly obligations are unlikely to be able to accept sizeable principle reductions that will create large income tax obligations that they can't afford. This means Obama's debt principal reduction initiative will never get off the ground.

    Congressional opponents of renewing this legislation are assuming a lack of potentially severe consequences. It’s impossible to predict what might happen, but the downside risks are unquestionably high. It raises the real risk of directly leading housing prices to decline further or even plummet for a variety of reasons. Efforts at principal reduction could come to a stop as the public loses confidence in a housing recovery, the end of short sales could have a strong negative impact on the housing market, or underwater homeowners fearing tax consequences could decide to walk away from their homes, leading to a massive increase in the inventory of newly empty homes that banks must ultimately resell.

    None of this may happen, but the risks are real and unacceptable. A substantial drop in housing prices will almost certainly harm or destroy the already tepid pace of our economic recovery. Congress and the Obama administration are playing with fire. Sometimes those who do so remain unscathed, but sometimes they get burned.

    Congressional inaction also fails the pro-capitalism test. As an economic system, capitalism is intended to build the overall wealth of a society. To properly function, capitalism requires an equal playing field, absolute accountability for business decisions, and rules ensuring that markets function fairly. As I have repeatedly argued, the many failures of lawmakers and administration officials to hold the financial services sector to a capitalist model has created a financial sector that is anti-capitalist and wealth-destroying. The current predicament of homeowners who might rely on this lifeline is a direct result of this failure. To now penalize the weakest link in the chain is a further demonstration that we have created an economic system that is not fair capitalism, where everyone lives up to their responsibilities and is accountable for their actions.

    Capitalism only works when the citizenry believes it leads to fair outcomes. Our nation has already reached dangerous levels of anger. The lack of trust in our institutions is pervasive, and Americans who have always been regarded as optimists have turned cynical and lost hope. By taxing struggling families on phantom income, Congress will reinforce the belief that our economy is blatantly unfair and further wear away the remaining thread of our painfully frayed social fabric.

    Bruce Judson is Entrepreneur-in-Residence at the Yale Entrepreneurial Institute and a former Senior Faculty Fellow at the Yale School of Management.

    Read more

    Share This

  • For Capitalism to Survive, Crime Must Not Pay

    Apr 12, 2012Bruce Judson

    money-justice-scalesUnequal enforcement of the law will distort and destroy any capitalist society, and we may be witnessing just such a downward spiral in the financial sector.

    money-justice-scalesUnequal enforcement of the law will distort and destroy any capitalist society, and we may be witnessing just such a downward spiral in the financial sector.

    Capitalism is not an abstract idea. It is an economic system with a distinct set of underlying principles that must exist in order for the system to work. One of these principles is equal justice. In its absence, parties will stop entering into transactions that create overall wealth for our society. Justice must be blind so that both parties — whether weak or powerful — can assume that an agreement between them will be equally enforced by the courts.

    There is a second, perhaps even more fundamental, reason that equal justice is essential for capitalism to work. When unequal justice prevails, the party that does not need to follow the law has a distinct competitive advantage. A corporation that knowingly breaks the law will find ways to profit through illegal means that are not available to competitors. As a consequence, the competitive playing field is biased toward the company that does not need to follow the rules.

    The net result of unequal justice is likely to be the destruction of the overall wealth of our society. I don’t mean the wealth of individuals; I mean the total wealth of goods and services that are the benefits of healthy competition. To the extent that unequal justice prevails, entities that are exempt from the laws will, in all likelihood, be more profitable than law abiding competitors. Then they use their profits to further weaken competitors by using their illegal profits to further build their businesses at the expense of competitors. All of this business building activity is based on a foundation of sand, and ultimately the entire industry — or even the larger economy — becomes distorted. The “rogue” company gains power, changes markets, and destroys direct and indirect competitors because it is playing by different rules.

    The above scenario is not simply a hypothetical example. It is exactly what happened at Worldcom. As the company succeeded because of its then-unknown illegal activities, it grew, managed to take over MCI (one of the true innovators in the industry), and weakened competitors who could not match its profitability. Ultimately the whole edifice collapsed, causing massive wealth destruction in the telecommunications industry and the economy as a whole.

    In the WorldCom example, appropriate legal enforcement and prosecution did not occur until the accounting fraud and other crimes were detected. Thus, while it is more an example of undetected accounting fraud than unequal justice, the results are illustrative. In a society with unequal justice, the appropriate laws are never enforced, so entities acting outside the law continue to grow more profitable and powerful (as compared to everyone operating according to the rules). Moreover, the profits from illegal activities can be used to subsidize competition across the spectrum of business activities of companies acting outside the law — which further enforces the competitive advantage, and possible hegemony, of entities operating on a different playing field.

    Now, here’s why the above discussion is so important if we hope to return our economy to the dynamo of wealth creation for the entire society that is, in part, what made America a great nation. As economic inequality increases, two sets of laws implicitly develop: one set for powerful members of society and another set for the weaker. These two sets of laws are often defined by a single question: who is prosecuted for crimes and who is not. When powerful members of society can break the law without fear of prosecution, they will inevitably exploit this competitive advantage by engaging in profitable (but illegal) activity. At the same time, the weaker members of society can’t compete; they are shackled by the need to follow the laws of the land. Meanwhile, everyone loses as the profits of companies violating the law distort the competitive playing field and the activities of everyone in it and divert societal activity from the creation of real wealth.

    Join the conversation about the Roosevelt Institute’s new initiative, Rediscovering Government, led by Senior Fellow Jeff Madrick.

    In effect, equal enforcement of the law is not simply important for democracy or to ensure that economic activity takes place, it is fundamental to ensuring that capitalism works. Without equal enforcement of the law, the economy operates with participants who are competitively advantaged and disadvantaged. The rogue firms are in effect receiving a giant government subsidy: the freedom to engage in profitable activities that are prohibited to lesser entities. This becomes a self-reinforcing cycle (like the growth of WorldCom from a regional phone carrier to a national giant that included MCI), so that inequality becomes ever greater. Ultimately, we all lose as our entire economy is distorted, valuable entities are crushed or never get off the ground because they can’t compete on a playing field that is not level, and most likely wealth is destroyed.

    The central question for the nation right now is whether we are, in fact, in the middle of the dire and dangerous cycle described above. Washington insiders have reportedthat the Justice Department is explicitly choosing not to prosecute seemingly illegal bank activities. Indeed, in my previous column I noted that the audits released by the Office of the Inspector General of the Department of Housing and Urban Development detailed activities by senior banking officials associated with the robo-mortgage scandal that seem to constitute clear evidence of multiple federal felonies, and most likely violated state laws as well. Yet no one has been indicted.

    In an entirely different sector of financial services, the venerable American Banker just completed a three-part series on past credit card debt collection practices. Many of these activities are now under investigation by the Office of the Comptroller of the Currency. But if the past is prologue, it’s unlikely that any criminal indictments will result, no matter what these investigations uncover.

    Indeed, as has been repeatedly documented, when illegal activity is detected, the SEC settles with the banks in civil lawsuits for sums that, while appearing to be large, are a pittance compared to the profits of the institutions involved. While these same activities would in many cases constitute criminal violations, no prosecutions have occurred. The bankers who operate our largest financial institutions can rightfully assume that they are above the laws that constrain everyone else.

    The evidence that crime does, in fact, pay is perfectly clear. Before the 1990s, the total profits of the financial services sector rarely accounted for more than 20 percentof the total corporate profits of the nation’s economy. By 2005, they averaged aboutone-third of all corporate profits. After sinking as a result of the crash, they rebounded dramatically. By early 2011, the sector once again accounted for about 30 percent of total corporate profits. As The Wall Street Journal noted, “That’s an amazing share given that the sector accounts for less than 10 percent of the value added in the economy.”

    Finance serves a valuable function. Its principal role is to ensure that capital is most efficiently allocated in a society. However, financial services are also an intermediate good. They grease the wheels, through capital allocation, so that real goods and services that people consume or experience can be created. Yet, as the Journal noted, the sector’s profits are far in excess of the value the sector adds to the overall economy. At the same time, recent academic research has suggested that the financial sector has become less efficient over time, with the gains from information technology cancelled out by increases in trading activity (whose social value is certainly open to question).

    This will ultimately lead us in a downward spiral: A few large powerful entities and people operate above the law, inequality is extreme, citizens have lost faith in their political systems, real societal wealth is not created, and political instability becomes a potential reality. John Adams held that “We are a nation of laws, not men” for a valid reason. Now, we need those charged with enforcing our laws to do their job.

    Bruce Judson is Entrepreneur-in-Residence at the Yale Entrepreneurial Institute and a former Senior Faculty Fellow at the Yale School of Management.

    Read more

    Share This

  • A Seven Day Plan to Finally Hold Wall Street Accountable

    Mar 19, 2012Bruce Judson

    money-justice-scalesNew evidence points to illegal behavior. Prosecution is the only way to keep that behavior from continuing.

    It's now a near certainty that Wall Street executives committed felonies.

    money-justice-scalesNew evidence points to illegal behavior. Prosecution is the only way to keep that behavior from continuing.

    It's now a near certainty that Wall Street executives committed felonies.

    The recently released audits of robo-mortgage activities by the Office of the Inspector General of the Department of Housing and Urban Development (HUD) details shocking behavior at the five banks constituting the Federal Housing Administration's largest mortgage servicers. At Wells Fargo, management quashed a midlevel manager's study of the foreclosure process as negative results began to emerge, and it gave an individual whose last job had been in a pizza restaurant the title of "vice-president of loan documentation" to facilitate robo-mortgage signing. Bank of America evaluated employees on the volume of foreclosure affidavits produced. JP Morgan Chase gave individuals titles such as "vice-president of Chase Home" where "the titles were given by Chase for the sole purpose of allowing individuals to sign documents and came with no other duties or authority." Citigroup and Ally similarly engaged in seemingly illegal practices.

    Under federal law, the knowing filing of a false affidavit with the court is a felony offense of perjury, punishable by a prison term of up to five years. An individual violates laws against perjury whether he or she personally appears in court and swears to a false statement or provides the court with a false affidavit. Individual states have their own perjury laws, which were undoubtedly violated as well. The HUD report also suggests that individual banks may be guilty of obstruction of justice and the criminal violation of the False Claims Act for filing insurance claims without following HUD requirements.

    Since the start of the financial crisis, federal and state officials have been struggling to change Wall Street behavior. To date, every effort has failed miserably, and the weak enforcement provisions of the robo-mortgage settlement are unlikely to meaningfully change this dynamic. Government officials have also relied, with a very few exceptions, entirely on civil enforcement when criminal laws appear to have been egregiously violated.

    The greatest moral hazard now confronting the nation is what appears to be increasingly brazen criminal activity by financial industry executives. With each decision not to prosecute, Wall Street executives justifiably conclude that they are immune to the rules. As a result, it appears that Wall Street criminal activity is increasing in frequency and severity, as opposed to the reverse. The activities surrounding the collapse of MF Global are one example.

    So what can be done about it? We can change the behavior in the financial service industry for a full generation in just seven days. This plan may seem to be tongue and cheek, but it hearkens back to a similar action in the era of the Great Depression. In the final months of Herbert Hoover's presidency, the Senate Banking Committee began an investigation into the causes of the Great Crash of 1929, and a young prosecutor named Ferdinand Pecora was appointed as Chief Counsel. Subsequently, the Roosevelt administration conveyed to Pecora that "the prosecution of an outstanding violator of the banking law would be the most salutary action that could be taken at this time. The feeling is that if the people become convinced that the big violators are to be punished, it will be helpful in restoring confidence." Ultimately, this investigation, which came to be known as the Pecora Commission, led to the indictment of one of America's most prominent financiers; demonstrated widespread self-dealing in the financial sector; and, as noted by historian Alan Brinkley, generated "broad popular support" for Roosevelt's reform agenda, including the creation of the SEC and the Glass-Steagall Act.

    Buy a copy of The Unfinished Revolution: Voices from the Global Fight for Women’s Rights, featuring a chapter by Roosevelt Institute Senior Fellow Ellen Chesler.

    My seven day plan is based on a simple premise: When criminal laws are egregiously violated, the guilty parties should face appropriate punishment. Here's the plan:

    Day One: Read the HUD Inspector General's reports and the public records of past mortgage foreclosure cases from across the nation.

    Day Two: Meet with the team at the Office of the Inspector General at HUD that prepared the audits. Obtain the names of all the bank officials, lawyers, and notaries whose behavior, as cited in the audit reports or otherwise known to the investigators, represent clear and unquestionable criminal violations. Add to this list other individuals who have similarly demonstrated or testified to behavior unquestionably constituting criminal acts, as indicated by the public records of the mortgage foreclosure cases reviewed in day one.

    Day Three: Indict all of the individuals on the list compiled on day two.

    Day Four: Indict banks and financial institutions on criminal charges where criminal behavior by employees (as demonstrated by day three indictments) appears to be endemic. The Justice Department guidelines for prosecuting firms include: (1) the pervasiveness of such activity, (2) the compliance procedures in place, (3) attempts by the corporation to end bad behavior, and (4) cooperation with federal investigators. In 2008, the Justice Department adopted a policy of accepting "deferred prosecutions," involving agreements to change corporate behavior without damaging innocent third parties through prosecution.

    Corporations receive the benefits of "legal persons," as demonstrated by Citizens United. But they must also bear the responsibilities of these privileges. A reading of the HUD reports, and other public records, suggests several banks should clearly be prosecuted.

    Day 5: Discuss plea bargains with indicted lower-level officials in return for cooperating in investigations of higher-level officials.

    Day 6: Consider plea bargains with indicted banks, which require the removal of all remaining officers and directors who were serving when egregious criminal activity occurred, as well as senior officials who were in a position to exercise appropriate supervisory responsibility but chose to look the other way.

    Day 7: Indict any senior Wall Street officials implicated by new cooperative testimony resulting from activities on day five. Adopt and announce a policy that future criminal violations will be prosecuted in a similar fashion.

    What is particularly disturbing is that a look at the evidence already in the public domain (much less what investigators already know) shows that none of the actions discussed above are entirely absurd. The purpose of prosecution not simply punishment. It acts to deter further illegal activity and to restore public confidence in our system of governance. The nation desperately needs both of these benefits today.

    Moreover, these ongoing, almost certainly criminal activities are ultimately dangerous threats to our economy, the success of capitalism, and our democracy. In his column on MF Global, Joe Nocera noted that "customers need to be able to trust" the laws protecting their money. "Otherwise, the markets can't function."

    Today, as in the era of FDR, we must send a message to the financial community that illegal behavior will not be tolerated. By prosecuting blatant felonies now, we will deter future misbehavior and begin the process of recreating a fair society where equal justice prevails.

    Bruce Judson is Entrepreneur-in-Residence at the Yale Entrepreneurial Institute and a former Senior Faculty Fellow at the Yale School of Management.

    Read more

    Share This

  • Are Bankers Capitalists?

    Mar 1, 2012Bruce Judson

    wall-street-150Jamie Dimon says banks are more successful than media companies, but which industry is actually following capitalist principles?

    wall-street-150Jamie Dimon says banks are more successful than media companies, but which industry is actually following capitalist principles?

    The phrase "Wall Street" is evocative in American culture. For generations, it has referred to the showcase of American capitalism: our financial services system that ensured the efficient use of funds by channeling capital to its most productive use. Indeed, the governing ethos in America is that Wall Street is the heart and soul of our capitalist economy.

    As I have written before, capitalism involves four basic principles: absolute responsibility for anything and everything that happens to your company (i.e. total accountability), equal justice under the law, compensation based on the real value created for society, and competition, which involves failure and what is often called creative destruction.

    The CEO of JPMorgan Chase, Jamie Dimon, has repeatedly touted the success of his efforts and disparaged critics. Earlier this week he compared compensation in the banking industry to the struggling media world, suggesting that the banking industry was far more successful. In speaking to journalists, according to Bloomberg, he noted, "Worse than that, you don't even make any money... [while] we make a lot of money."

    Mr. Dimon is right. He and his colleagues are successful. But the real question is this: What are they successful at? By almost any criteria, the banks operate under rules that are so far from capitalism as to be unrecognizable. Let's take Mr. Dimon's comparison of the media industry and the banking industry further.

    Both industries have been affected by unforeseen events. The Internet has undermined the viability of innumerable media businesses, leading to bankruptcies, changing business models, and intense competition for advertiser and subscriber dollars. In the face of these changes, industry participants have been forced to adapt or die. The forces of creative destruction, which are central to capitalism, have operated with an unforgiving ferocity. Formerly dominant entities have been forced to declare bankruptcy, while new media competitors and business models emerge on a seemingly daily basis.

    In contrast, the banks argued that TARP was warranted because the economic tsunami of 2008 was unforeseeable. One of the essential functions of a financial institution is to manage risk. The majority of our large institutions failed entirely in this central responsibility as the economic crisis struck. In effect, many of our leading financial services firms were (and often continue to be) led by such poor businesspeople that if the principles of capitalism were enforced they would be out of business. My friends who are media entrepreneurs in Silicon Valley actually laugh when they hear the "we should not be responsible because this was not foreseeable" claims from the bankers. Every entrepreneur knows that they must make payroll each week or they are bankrupt.

    At the same time, no one in Washington seriously believes the too big to fail legislation in Dodd-Frank will ever work. Inevitably, as in the case of AIG, counter-parties will declare that they will suffer irreparable harm if one of our leading banks is allowed to fail. I have come to call this "the Washington wink." You ask a federal official if too big to fail legislation will work, they dutifully say of course it will. However, the "of course" is inevitably accompanied by a knowing wink.

    Check out “The 99 Percent Plan,” a new Roosevelt Institute/Salon essay series on the progressive vision for the economy.

    In another divergence, the government has not subsidized media businesses. The banks may be showing profits, but they are on government life support. These so-called zombie banks can borrow from the Federal Reserve at almost no cost, and a long list of government initiatives have served as additional "stealth" bailouts of the banks. In the absence of this government support, would the banking industry still be successful? If media companies could borrow funds at almost no costs, I suspect their balance sheets and profits would be dramatically enhanced.

    Capitalism is built on the idea that compensation and profits reflect the relative contribution an individual or firm makes to the total wealth of a society. Real societal wealth is anything that can be consumed or experienced. Profits are an accounting proxy meant to measure wealth. As I have written before, this proxy has failed miserably with regard to the banking industry. Given the loss of real societal wealth that accompanied the economic crisis as a result of poor bank management, the employment crisis, and the ongoing support the industry needs from the government, there is only one possible conclusion: at this moment the financial services industry is far more of a destroyer of real wealth than a wealth creator.

    Meanwhile, media companies don't profit by repeatedly breaking the law. The lack of enforcement against Wall Street undermines our democracy and capitalism, and is effectively another form of stealth government support for the industry. As noted here, JP Morgan Chase (like several of the large banks) is in the middle of a host of potential scandals. In a true capitalist economy, the government would enforce the law to prevent repetitive malfeasance. The executives leading a firm that repeatedly violated the law would be held accountable by the firm's board for failure to exercise this basic responsibility to society.

    Since the start of the economic crisis, the financial services industry has grown even more concentrated. It's hard not to regard our largest financial services institutions as effective monopolies. Yet, to my knowledge, no investigation of antitrust issues related to the industry is underway. This is yet another stealth government subsidy. By contrast, in an earlier article I wrote about the misguided Justice Department investigation of e-book pricing, another area that is already suffering badly.

    Yes, Mr. Dimon, you are a success. However, I would suggest that the success you so proudly proclaim reflects the loss of two of our nation's most important values. The first is the failure of individuals and leaders to simply take responsibility for their actions and the actions of their companies. The second is that Wall Street, which should be the heart of American capitalism, has instead become the heart of a dysfunctional system that is destroying the nation's wealth.

    No, bankers are not capitalists. At every turn, they demonstrate that the last thing they want is the return of real capitalism to America.

    Bruce Judson is Entrepreneur-in-Residence at the Yale Entrepreneurial Institute and a former Senior Faculty Fellow at the Yale School of Management.

    Read more

    Share This

Pages