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The Emergence of Commissar Capitalism? – JP Morgan and the Settlement

We have all read that J.P Morgan has just agreed to pay $13 billion to the Feds for its transgressions during the financial crisis. I think that this is a just decision, otherwise I don’t think JP Morgan would have agreed to it. But there are some aspects of it which really worry me. For starters, why just one bank? And why not punish government agencies too (e.g. Fannie Mae, Jefferson and San Bernadino counties, etc. etc.)

And you might remember that it was JP Morgan that acquired Washington Mutual in 2008, at the urging of the Feds to help save the then-rapidly-sinking US financial system. JP Morgan was thus saddled with many of the bad practices that had led WaMu to tank and caused it some of the troubles that led to the settlement. Is there no gratitude these days?

A $13 billion payment looks less like punishment to me and more like an intergovernmental transfer, simply because of its huge size and the fact that no other company or institution has faced a similar penalty. Jamie Dimon isn’t going to get fired and why not? He just reduced the Federal deficit by $13 billion (he must have read my last blog post “Fix the Deficit: Sell Puerto Rico and Alaska”). In other words, JP Morgan looks less like a private than a public sector entity in doing this and Dimon looks more like a civil servant or party functionary than a private sector manager or, (sniff) entrepreneur.

Ever heard of the term “apparatchik”? That was the term applied to government and Communist Party managers in the Soviet Union when it was still explicitly and proudly Communist (as distinct from now). An apparatchik was a Party bureaucrat whose essential job was to do what the Party told him, no matter what the rationale. A senior apparatchik was called a commissar.

In such a system when you have a choice between a government command and economic efficiency, it was understood that the command always came first, no matter how senseless. For a supremely egregious example, see the Great Leap Forward in Mao’s China.

To me Jamie Dimon and the JP Morgan guys look like they are turning into a form of commissar. Not that that’s necessarily a bad thing, as we can see with their “donation” to the Feds. It’s just to remark that the automatic presumption that, in today’s cradle of capitalism, all senior executives of major companies act like classic capitalists is departing ever further from reality.

That’s particularly the case with regulated industries such as banking and finance but of course healthcare is now an integral part of the mix. Autos are partly there as well; airlines are getting there. As regulation continues to cover other industries, will they too move away from what we regard as “pure” capitalism to a combination of capitalism and government mandates? I call this new form of economic system “Commissar Capitalism”.

So what are the implications of this move? Well for a start we can’t analyze these regulated industries from the viewpoint of classical economics, or even from the perspective of the emerging science of behavioral economics. You really need to study and integrate the lessons of political science to get to what is really going on. Without understanding the politics, you certainly can’t understand the economics, presuming that there will be any.

And it’s not just regulated industries that are affected either. It’s industries that I would call semi-regulated or crypto-regulated. The latter includes industries that seem to be free of political factors but that are nonetheless impacted by under-the-cover political influences; examples are the auto industry, nuclear power and alternative energy industries.

Secondly, it makes stock and valuation analysis difficult or impossible. If the main valuation influences are not economic but political, how do you know when you will suddenly be hit by a Black Swan from the blue? Did JP Morgan stockholders consider that they might have to fork out $13 billion to Uncle Sam? What does that do to their stock value?

Next it really impacts leadership development. It’s not just about having an MBA anymore. Maybe you need a Master’s in Public Administration or even a degree in political science. And potential leaders must learn how to deal with the political side of the equation if they get to be top dog. Are there any lessons at university or business school in that right now? I don’t think so and I bet that even Jamie Dimon was shocked when he discovered the size of the damage.

It also impacts approaches to risk analysis. No longer is political risk something that just applied to putting an oil operation into Nigeria or Venezuela. It’s something that also applies to the US. If JP Morgan has to pay $13 billon, who’s next? Citi for its wealth management transgressions in Japan? Apple, for labor violations in China? Duke Energy for killing 14 bald eagles? Coca Cola for sugary sodas?

New risk analysis approaches will have to be devised across both regulated and unregulated industries since the latter will be impacted by Black Swans in the former. That means approaches to decision-making have to integrate much stronger and maybe fundamentally different approaches to decision-making under uncertainty.

It also impacts what we teach young people. The gold standard qualification for going into business has been the MBA. But of course the MBA is built on the bedrock assumption that companies are run based on rational economic principles which are aimed at profit maximization and economic and financial efficiency. Clearly we have to modify that assumption dramatically, if not throw it out of the window. Are academics, universities and business schools, let alone students, prepared to cope with this?

Moreover, de facto the MBA is a qualification for going into big, not small business. How does Commissar Capitalism impact your calculus for starting a new company or business? Will you need government backing like you do in China, or otherwise you may be toast?

Now you shouldn’t read the above as being against regulation, or a cri de coeur to bring back Ayn Rand. In an ever-more complex world we need regulation and we probably need more of it than less.

Neither should you read it as being against government intervention in the economy. I happen to think that the Federal government’s intervention in the financial crisis was vital and correct. I have no doubt that it will be needed again when the next bubble comes along.

In fact I also believe that in some areas we actually need to up the ante on regulation, for example by bringing back Glass-Seagall and getting really tough on insider trading (including by Senators and Congressmen and their staffs, let it be noted).

But the penalties have got to be even-handed. They have to hit the hucksters who populate both the private sector and government alike. They have to be seen to be fair, as well as being fair. And to the extent that massive penalties have the unintentional consequence of changing basic assumptions about how our economic (and political) system works and about risk management across all industries, governments have to exercise extreme care that whatever they do doesn’t upset the applecart that they want to keep.

We don’t want more Scroogles like ObamaCare. We don’t want to even appear to look like China with its central control and the numerous dysfunctions that accompany it. That, despite government intentions to the contrary, may well be how many observers see the JP Morgan settlement.

Notwithstanding their bad name, you do need some apparatchiks and commissars. But you won’t want them in control. You don’t want a commissar culture. Above all, you don’t want full-blooded Commissar Capitalism.

 

 

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Tuesday, 23 October 2018

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