“Something Is Wrong & It’s Holding Us Back”

“The United States of America is truly an exceptional country,” says controversial JPMorgan Chase CEO Jamie Dimon, “but it is clear that something is wrong — and it’s holding us back.” Dimon’s annual letter to shareholders identifies some of the things that are wrong and suggests ways to fix them.

Dimon is controversial simply because he headed one of the nation’s leading banks at the time of the 2008 mortgage crisis, yet to the Antiplanner he was one of the heroes of that crisis. The mortgage bond market was invented by JPMorgan, but when Dimon became CEO he recognized the market wasn’t viable and ordered the bank to stop trading such bonds. When Bear Stearns and Washington Mutual went broke because of their heavy involvement in such bonds, it could have precipitated a major financial crisis, and Dimon agreed to take over those banks to avoid that crisis

Such takeovers are the standard way the U.S. government has dealt with failing banks, and they are not a gift to the banks doing the takeovers. The banks agree to accept the defunct banks’ assets and (much larger) liabilities in order to keep the monetary system going as well as to save the Federal Deposit Insurance Corporation billions of dollars it would have to spend paying off insured depositers.

When Lehman Brothers went broke, and it became clear that AIG and Citibank were next, there were no other banks big enough to take them over, so the government bailed them out. That doesn’t belittle what JPMorgan Chase did in preventing such a crisis from happening when Bear Stearns and Washington Mutual went bankrupt several months before.

As a reward for saving the economy, JPMorgan Chase was slapped with an $18 billion fine based on the supposedly unethical (but in fact entirely legal) practices of the banks that it took over, even though JPMorgan Chase itself hadn’t been guilty of those practices. (It ended up paying $13 billion of that fine.) This was merely an effort by the Obama administration to find a whipping horse for the financial crisis, and it is likely to cause long-run problems because in the future banks such as JPMorgan Chase are going to be a lot more reluctant to take over other banks as they are dying.

Now Dimon is offering advice to the government, and I hope someone is listening. What’s wrong with the country, he says starting on page 32 of his letter, is low productivity, and there are several causes of that low productivity:

• “Over the last 16 years, we have spent trillions of dollars on wars when we could have been investing that money productively.”
• “Since 2010, when the government took over student lending, direct government lending to students has gone from approximately $200 billion to more than $900 billion.”
• “Our nation’s healthcare costs are essentially twice as much per person vs. most other developed nations.”
• “40 percent of those who receive advanced degrees in science, technology, engineering and math at American universities are foreign nationals with no legal way of staying here even when many would choose to do so.”
• “Felony convictions for even minor offenses have led, in part, to 20 million American citizens having a criminal record–and this means they often have a hard time getting a job.”
• “The inability to reform mortgage markets has dramatically reduced mortgage availability.”

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Dimon goes on to mention “six additional unsettling issues that have also limited our growth rate”: low labor force participation, growing income inequality, a failing education system, poor infrastructure planning, a corporate tax system that drives capital overseas, and excessive regulations that slow growth. Some of his suggestions for solving these problems (such as expanding the earned income tax credit program) aren’t exactly libertarian but are worth looking at.

While all of these things affect JPMorgan Chase indirectly, the only one that directly affects the bank is the mortgage market. Dimon’s advice for reforming the mortgage market is on pages 25 through 29 of his letter. In short, he believes that much of the new regulation that followed the financial crisis was “hastily developed and layered upon existing rules without coordination or calibration as to the potential effects.” The result is a system that is both riskier and inhibits growth. Simple changes could lead to $300 billion a year of new lending, and a concurrent rise in homeownership, without increasing risk.

After the financial crisis, many commentators argued that, due to low incomes, some people just shouldn’t own homes and instead should expect to rent all their lives. Yet this is contradicted by the fact that homeownership rates in many countries with far lower incomes, including Brazil and Mexico, are much higher than in the United States. Here in the U.S., the main obstacle to homeownership is not income but government regulation.

Dimon understands that such regulation is one of if not the main cause of income inequality. While the regulation he is writing about is different from the regulation I have written about, both need reform to restore American productivity and economic mobility.