“Do you support workers’ rights, specifically, the right to not  join a union?”

If I were a union boss, I’d have no counter-move to that.  What could I say?

Continue reading at Forbes Opinions…

At least Jake and Elwood had a fallback, something they could lean on when in need of a little moral support.    When it comes to “climate change”, what and where exactly is President Obama’s support?

Addressing climate change just doesn’t rank very high with voters.   Amongst the top ten “most important issues” listed in a recent Rasmussen poll, climate change was not to be found.  And the trend on what people believe is the root cause of global warming has the planets beating the people pretty handily.

But with the remarkable live feed from the bottom of the Gulf of Mexico still showing the sickening sight of oil belching into the water, one can not help but think of that please-gimme-a-Mulligan phrase from Rahm Emanuel, “You never want a serious crisis to go to waste.”

Dealing with the oil spill is one thing.   Making the leap from there to push a a costly “cap-and-trade” energy policy faintly associated with climate change is quite another.   It seems that rather than confronting a supposed “inconvenient truth”, Obama is attempting an inconvenient non sequitur.

This shouldn’t be a surprise

During the presidential campaign, Obama’s candid feelings about energy, climate change, and the likely effects of his policies were made abundantly clear in a 2008 interview with the San Francisco Chronicle:

“The problem is, can you get the American people to say “this is really important” and force their representatives to do the right thing?  That requires mobilizing a citizenry.   That requires them understanding what is at stake.   And climate change is a great example.   You know, when I was asked earlier about the issue of coal, uh, you know, under my plan, of a cap and trade system, electricity rates would necessarily skyrocket, even regardless of what I say about whether coal is good or bad, because I’m capping greenhouse gasses.   Coal power plants, natural gas, you name it, whatever the plants were, whatever the industry was, they’d have to retrofit their operations.  That will cost money.  They will pass that money on to consumers.”

Between Obama’s June 15th prime time speech and other media outlets, attempts at mobilizing the citizenry are well underway. The New York Times describes the plan of attack, no doubt crafted to not waste a crisis:

“[Democrats] now believe they know how to use the Gulf of Mexico oil spill to secure the necessary Republican votes….    On the financial reform bill, Senate Democrats harnessed public outrage at big business to force Republicans to the table…..    Democrats have been attempting to tie the need for sweeping energy and climate legislation to the ongoing BP PLC oil leak since it began, but the new plan appears to go a step further. By including drilling safety reform in the bill, they hope to make the case that a vote against the package is a vote for BP and “Big Oil.”

Amongst the tragic dimensions of the BP spill is the unfortunate statistic that of the tens of thousands of drilling operations that have been undertaken in the Gulf of Mexico, this accident represents only the second underwater leak.  It bears repeating that BP is struggling with robots and the extreme conditions of metal-working nearly a mile below sea level almost entirely because regulations and policies have forced them to.   Indeed, there seems to be a direct correlation between the difficulty of the drilling location and our willingness to let energy companies operate there.   Did BP make mistakes?  Without question.   Is the market punishing BP and its shareholders?   $100 billion dollars of lost market capitalization so far would seem to say that it is, and the punishment continues daily.   Granted, this means little to a shrimp fisherman whose business is being wiped out.  But BP has also displayed little public reticence to making such stakeholders whole.

You can’t get there from here

But the disconnect to climate change is the following:  Existing regulations on drilling operations did not prevent the spill, nor are they likely to prevent a new one, as Michael Barone describes.   And regardless of how the BP spill is resolved, none of that is going to affect our climate.   Indeed, the very catch-all term itself, “climate change” (which nicely allows for both global warming and cooling) represents the height of liberal arrogance that humans can even make any meaningful difference to a planet’s climate.    With the basic premise of “cap and trade” being to incentivize companies to reduce greenhouse gases, if the science behind greenhouse gases being a “cause” of global warming is now more in doubt than ever, wouldn’t any potential legislation resting on this premise be correspondingly dismissed? Not if the true push behind the legislation was simply to raise money for other federal spending.

At so many opportunities, “oil companies” and “greed” seem to appear in the same sentence.  But if “greed” supposedly makes an oil company manipulate the prices of its product, would not the same greed spur that same company to provide as many products as it could to monetize the world’s desire for more environmentally friendly products?   Why would these greedy companies sit back and watch such a money-making opportunity be captured by someone else?    BP, Exxon Mobile, or any of the large oil companies would have the resources to produce the transformational electric car, or solar panel, or perpetual motion machine, if it were really that easy to do so.    Lastly, there is the inconvenient truth that supposedly “green” forms of energy are just not nearly as efficient and cost effective in delivering the goods as their hydocarbon counterparts, as  Scott Johnston’s recent piece on renewables makes abundantly clear.   If government really wants to play a role in assisting with innovation,  it should stop pretending that Keynesian-style subsidies and redistributions actually work, and promote proven policies that reward human ingenuity and technological investment.

Don’t mistake any of this for a being a defense of BP.    Rather, it is a necessary if painful discussion of the risks associated with the rewards of capitalism, and of human advancement in general.   If anything, people are perhaps being surprised by sheer quantity of gushing oil.   Might that be an indicator of how much additional oil we might discover if we simply had the national willpower to apply all of our technological prowess to look for it?

As the campaigns heat up for the November elections, it is clear that the Obama gang is taking what may be their only shot at delivering the “change” that they sold to the public in 2008.   The public’s not buying it, but like sweeping healthcare reform, they may just get it anyway, even as the Democrats lose Katrina as a big-bullet talking point.   Where Jake and Elwood Blues were on a mission from God, it seems like Obama’s mission is more of the Kamikaze variety.

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Shock at the blatant hypocrisy.   Awe at the depth and breadth of economic illiteracy.   This was populist demagoguery at it’s finest, and one could write a book on the distortions, fallacies and misinformation in just this one seven minute interview.    Let’s take a look at some highlights:

Haines:   What do you want?  What are you trying to prove or point out today?

Trumka:  Well there’s three things that we want to say.   These guys destroyed eleven million jobs.  They wrecked the economy.   They got bailout money.   And they haven’t learned a lesson.   So we want them to do three things.   We want them to pay their fair share, to create the jobs that they destroyed.   Two, we want them to stop fighting Wall Street reform, because they send a legion of lobbyists to D.C. to stop it from happening.   Three, we want them to start lending to small and mid-size banks so they can create jobs.

Have we entered the Twilight Zone? A person takes on a NINJA loan (No Income, No Job or Assets), pushed by a lender that is ultimately implementing Congress’ push to increase home ownership.   Their mortgage payment rises, they default on the loan, and it’s Wall Street’s fault?     Aided and abetted by legislators, union contracts and guaranteed benefits accelerate the growth in state and local budgets, pushing many to near bankruptcy, and it’s Wall Street’s fault?   The Federal Reserve and Treasury tell banks to boost their capital ratios, and everyone complains about bad risk management.  Banks respond by tightening lending requirements, and Wall Street has destroyed eleven million jobs as a result?   What the?

Yes, Wall Street got bailout money, money which many of the banks didn’t want.   Just as some firms didn’t want to mark some of their positions to market, the Fed and Treasury didn’t want to mark entire firms to market either, so they tried to hide the more vulnerable companies in and amongst the stronger ones.   This is a taking-one-for-the-team the bank industry will never live down, TARP repayments notwithstanding.

Regarding Wall Street reform, didn’t Sarbanes-Oxley solve that problem in 2002?   Never mind, that’s a whole other story.

But sending “a legion of lobbyists to D.C.” — now that’s golden.   This from an organization whose stated goal, along with the other unions, is to pull out all of the lobbying stops to get Card Check passed, to use the force of government to try to slow the unmistakable downward trend in union membership.

It continued…

Trumka:  We’re fighting to create jobs.  There’s nobody out there right now except the labor movement that is fighting to create jobs and taking these guys on.   They destroyed eleven million jobs.  America needs those jobs back.  The labor movement is out fighting for them.

Without a doubt, labor unions have saved jobs.   They’ve saved them by ensuring that capital that might have better been re-directed away from the control of bad management and/or into more productive uses stayed where it was, preserving jobs in companies that should have shed them, or even preserving whole companies.  But how about actually creating jobs, as in, truly new jobs?   It seems like Mr. Trumka doesn’t understand that first and foremost, governments, unions or even small and mid-size banks, do not create jobs. Risk-taking entrepreneurs create jobs.  And when the legislative outlook is as cloudy as it is right now, they do the prudent thing, which is to say, they preserve their capital by hunkering down.

Trumka: They destroyed $13 trillion worth of wealth for the rest of America.

I suppose that Mr. Trumka is making some generalized reference to the total reduction in stock market valuations, reflected in peoples’ 401K’s, pensions and other savings vehicles.   Markets may have dropped, but is Mr. Trumka actually claiming that these Wall Street firms had the power to move the markets to that magnitude, all the while resisting the obvious opportunity to profit wildly as they controlled its every move?  Evidence would seem to prove the contrary.    But wait a second.   Don’t the unions lead the class-warfare chant that says that most of the stock-market wealth in this country is held by the “rich”?   So then it would be the “rich” that took most of the $13 trillion dollar hit.   What are we complaining about then?    They can afford it, right?

Burnett:  How can they create those jobs?   I mean, that’s my question.  What would you say to them today, if you had Lloyd Blankfein standing here from Goldman Sachs?  Mr. Blankfein I need you to do X, to create a job, what do you do?

Trumka:   I’d tell him to do a couple X’s.   One, pay your fair share.  Give us a transaction tax of a quarter of a penny, we’ll get 150 billion to 300 billion dollars, and we’ll start creating jobs in America.   Two, start lending to small and mid-size organizations and businesses out there so they can start creating jobs.   And three, starting paying your fair share, pay the same level of taxes that they rest of us do, so that we have the revenue in this country to save teachers, to save firemen, save police officers and get this country back on track.

Ah… now we’re seeing the prize.  Somebody get the drool buckets.   Hundreds of billions of dollars of additional revenue to be brought into government control, so they (and their union buddies, presumably) can direct the money as they see fit.  But of course!

And regarding paying the same level of taxes that the rest of us do, let’s see:   First, nearly 50% of filers don’t pay income taxes, but my guess is that that’s not what Mr. Trumka would have the banks emulate.   Second, all the income of the banks’ employees gets taxed like “the rest of us” — because it’s all the Same Street. But lastly, all of the corporate taxes that the banks (or any company) pays represent funds that could have been spent on something else, such as higher wages, benefits, capital investments, even hiring new employees (i.e., creating jobs).

Burnett:  …a lot of these people are tellers, right?   And it seems like you’re saying just because you work for a bank you’re a bad person.  That’s the feeling… that people get…

Trumka:  No, I’m not saying that.

Burnett:  Okay, so, so what are you saying though?  Because you keep gesturing that these guys destroyed, that these guys did this.  Can I get to the point?

Trumka:  The banks.  The banks and the people that control the banks.  Wall…  Citibank.  Citibank.  Citibank.

A slip of the tongue perhaps?   Vikram Pandit really isn’t nearly as powerful as you think, Mr. Trumka.   Who really controls the banks?    That would be the Federal Reserve, the US Treasury, the FDIC, the SEC and a host of other agencies and regulatory bodies that altogether make up the tail of the dog that is our federal government.  So let’s direct all of that passion to the right place.

Trumka:  They [the banks] need to start lending.   Everyone agrees that the lending market is still locked up, that these guys aren’t lending.

Here’s an idea Mr. Trumka:   Organizations like yours take in billions each year in “deposits” from your “customers” (the forced dues of your union members, to be perfectly clear).   Loan some of it out.   If there are so many worthy businesses out there in dire need of loans, and the banks are doing such a terrible job at meeting that need, surely you must be implying that you know of a better way.   So do it yourself.    Between your union, and Andy Sterns’, and Randi Weingarten’s, and Ron Gettlefinger’s and the rest of them, you could probably scrounge up capital on par with many of the supposedly non-lending Wall Street banks, so it seems like a huge opportunity has been laid at your feet.   President Obama would probably go for it.    Stealing the Wall Street bank’s customers would be the sweetest revenge, would it not?

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Merriam-Webster defines “speculate” as:

1 a : to meditate on or ponder a subject : reflect b : to review something idly or casually and often inconclusively
2 : to assume a business risk in hope of gain; especially : to buy or sell in expectation of profiting from market fluctuations

So it seems that to be a speculator, you need to have a view on something.   That’s generally the easy part, in that most people will express a view on just about anything.  Whether it is “correct” is another matter entirely, as is the issue of who decides what “correct” is.   But acting on those meditations and reflections results in the market itself:  two people having different views on the value of some tradable thing, each being willing to swap ownership.

One would hope that even Oxfam and the AFL-CIO would concede that no speculator “speculates” on a regular basis with the intention of losing money over the long term.   From that one truism, we can deduce that rational speculators have every incentive do a lot of reflection, and act only when they think they will be profitable.    So how do they act?

Speculators only garner attention when they displace some other market participant.   After all, if they simply replaced a supposed “non-speculator” at the same market price, who would know, or care?   Yes, there’s an important liquidity-providing role that can’t be understated.    That function rarely receives any attention, except when it’s missing, as in the credit markets of late summer of 2008, with the proverbial “market liquidity has evaporated” sorts of phrases being heard repeatedly.   Mostly, speculators get noticed because they move markets.   Indeed, they often have to.  But when they do, in every case, the person taking the other side of the speculator’s trade is made better off.    Here’s why:

Say two trading counterparties are about to transact on a product, say a barrel of oil, at $85.   The basic tenet of free trade would state that both parties are going to be made better off, in that the buyer of the oil will value the oil more than their cash, and the seller of the oil will prefer the cash.  Why else are these two people trading with each other?  Who knows? Certainly not Oxfam, a labor union, or any member of Congress.   But say a “speculator” suddenly interrupts the proceeding and tells the seller that they will pay $86 for the oil instead.   The seller says to himself, “Well, I was happy to sell it at $85, but I’m even happier to receive $86″.  So, in trader parlance, “done!”.

Why would the speculator “bid up the price” of oil to $86?   Because they’ve meditated, pondered, reflected and otherwise decided that they’re going to be able to sell the oil at something higher than $86, maybe later in the day, tomorrow, next week or next year.  They just want in.  They displace the $85 buyer and become an $86 buyer instead.   The speculator can’t trade without making their counterparty better off than they would have been with their supposedly “non-speculating” alternative.

What about the displaced $85 buyer?  If the speculator was wrong, and oil falls in price, that original $85 buyer has been afforded the opportunity to buy at a lower price.  The speculator’s loss becomes their potential gain.   However, if the speculator is right, the $85 buyer is faced with the reality that they’ll have to pay more — the market is telling them that at least at the moment, what they wanted is more valuable than they originally realized.    Of course, they might say, “no way — it’s not worth it” and walk away.

What about from the sell side?   Say a seller is out there ready to sell oil at $85, but the speculator displaces that seller by selling oil lower, at $84.  The corresponding buyer, who was ready to pay $85, is happy to trade with the speculator instead, because the buyer now has $1 left over.   Why would the speculator sell for less?   Because they’re convinced oil is worth less than $84.   They might even be shorting oil, happy to receive $84 now, believing they can replace that oil later by buying it back at a lower price and pocketing the difference.   What if oil goes up instead?   The speculator loses, and that displaced seller can sell again at a higher price.   If the speculator is right, their capital account increases and to whatever extent they’re consistently right, others may be able to monitor their activity and profit from it as well.

This brings us to the issue of time objectives. Many speculators want to be in and out quickly, while others make long term bets.   In either case, the dollars made or lost are indistinguishable as a form of capital (ignoring inflation and/or currency fluctuation).  So therefore, who’s to say which is more legitimate?   Capital raised through short-term speculation can be immediately re-deployed into a long term investment, or consumption of any kind.  In any case, the provider of the investment or consumable doesn’t care whether the requisite capital was raised over the short or long term.  “Sorry ma’am, we can’t accept your down payment on your new Prius.  We understand you made that money speculating.”  Not going to happen.

But short-term speculators enjoy a special distinction:   Remember that to get anything done the speculator has to be aggressive and has to be willing to act at the existing price, or establish a better price.   Therefore, short-term speculators are the market. They provide the liquidity that any market needs to work better, or at all.

How about people who would seek to reduce the activity of speculators, whether by high margin requirements, restrictions on short-selling, or other kinds of regulations?     Are the “non-speculating” actors in the market (however one would determine such a thing) somehow more informed, or in some way representative of a more legitimate type of market participant?   Do they make more legitimate or “better” prices?   We just saw that it was in fact the speculator, in search of a profit, that actually made a better price for their counterparty.   Do the would-be regulators know more about how the market should really behave than the people who are willing to act on their pondering?    For all we know some of the regulators might in fact be formerly failing speculators.

What about those speculators that seemingly churn each other and send a market consistently higher or lower over a protracted period of time, supposedly against the “true value” of the product?   Again, who’s to say what the “true value” is?   If someone is so convinced that the market is “out of whack” with the “true value” they can speculate themselves and profit from their truth.   In the meantime, if there are market participants who can’t be bothered with all of the fluctuations, products exist to smooth those out, such as home heating oil futures. And where they don’t, maybe they should:   Retail monthly or quarterly gasoline futures, anyone?

As the saying goes, “where there’s smoke there’s fire”.   Again, in the case of speculators, the profit motive ensures that they’re not just throwing money around willy-nilly.   So if for some reason a market is being “bid up” (or down), at least in part by speculators, one can bet that the more aggressive participants are acting on what they believe is better information.  In other words, they have to possess a more accurate view of where the “true value” of the traded product lies, at least for their time period of interest.

Indeed, if over time particular speculators develop reputations for being right more often than not, their sudden activity in a market can move the market.   Just ask any Chicago bond future trader about Tom Baldwin.   And behind every successful speculator is a grumbling displaced participant who is unhappy that they now have to provide a better value to their counterparty. Conversely, if over time a particular speculator is consistently wrong, the market will dispassionately drain their capital.   There is no need to regulate them because provided they are not bailed out, the market will regulate them out of existence without mercy.

But to a Congress that is bent on command and control, I’m just speculating that none of this will make any sense.

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It’s hard provide better verbiage on what DeMint describes, both in the setup of the importance of the issue and the implications of not getting our hands around the true causes of our recent crisis.   Any informed voter needs to be aware of this perspective, and of the presence of elected officials who are willing to buck the populism that keeps it from getting the attention it warrants.   So with that disclaimer, I’m quoting large portions of DeMint’s comments:

Sen. Jim DeMint

“When Congress created the Federal Reserve, they created arguably the most powerful institution in the whole world.  Our whole economy, all our prosperity, wealth, rests on the soundness of the dollar, as does much of the economic systems all around the world.  So as we consider your renomination it’s important that we ask some difficult questions, not just of you, but to ourselves, because no one can say that there haven’t been major failures and I think a lot of us have to admit that the Federal Government, the Federal Reserve let down the American people and a lot, a lot of people have been hurt.

I will take exception to one of the arguments that I’ve heard today and I’ve heard often about what we heard last October and what actually happened.    We were told that if we did not appropriate nearly a trillion dollars to buy toxic assets that the whole worldwide economy or economic system was likely to collapse.  We appropriated nearly a trillion dollars and we never bought one toxic asset and the world economic system did not collapse.   Now we can make a case and debate about all we want about whether or not twisting banks’ arms and forcing more money into the banking system actually helped us.  We could talk about that all day.   But the premise that we used, to create this TARP program, was never followed through on, and it’s difficult for me to find credibility in the arguments that we saved our economy.”

The bait-and-switch performed last fall under the financial doomsday scenario scare tactics described above is nothing short of criminal.   Recent reports of TARP’s supposed effectiveness miss DeMint’s crucial point:   The unprecedented program was passed using scare tactics for an implementation plan that was quickly  abandoned following its passage. Yet in “fool-’em-once-fool-’em-again” fashion, President Obama has the audacity to now want to take $200 billion of these TARP funds and throw it at other sectors and politically expedient portions of our economy.   But we won’t call it a “stimulus”…

DeMint continued:

“For me perhaps the biggest failure, in the Federal Reserve, in the political side here in Washington, is that, amid all these failures, the politicians, the folks in the Administration and Federal Reserve, have claimed credit for saving the system, while blaming capitalism and unrestrained free markets for our problems.   That has justified the positions that are now being taken here in the Congress in many ways, to come back and even extend the control, the intrusion of the Federal Government further into the private sector.  I think you’ve been a big part of orchestrating that, and shifting the blame onto the private sector.

Fed Chairman Ben Bernanke

No one’s arguing that there’s not blame to go around everywhere.   But the biggest failure I’ve seen, is the failure for us to recognize the role that we played and the lack of our oversight of Fannie Mae, who created a lot of these toxic assets and sold them around the world, the loose monetary policy that created chronically low unemployment rates and high leverage across the economy.   By not taking some of the blame, and making the public is aware of that, we’ve undermined the system that made this country prosperous, and I think that is an egregious error.”

Although I’ve written about this before, it warrants repeating that the attempts by many to move our economy away from free markets, to any extent, truly risk killing the golden goose.  And with the government’s nearly perfect track record of never repealing any major program or initiative, the stakes for preventing such major legislative endeavors that might permanently weaken our preeminently free-market orientation have never been higher.

More from the Senator:

“To a large degree the oversight that we’re responsible for here in this Congress we did not accomplish because of assurances that we’ve  gotten over the years, from your predecessor and from yourself and by doing that I think we have egregiously failed the American system.

…

I would again, as you and I have talked personally, ask you to consider the need to make the Federal Reserve more transparent.   There’s no need that independence needs to mean secrecy.  The confidence in the Federal Reserve, the mistrust around this country, has reached new heights, and we need to do something to restore faith that the American people have in their monetary system, their financial system, and that responsibility is at the Federal Reserve as well as in the Congress.   I would encourage you again to consider what type of openness, or “audit” as you and I have talked about, would be appropriate in order to reassure the American people that we’re not looking at another Fannie Mae situation, that over years we were told “not to worry, not to worry”, that everything is OK, and now we saw what it did.   We can’t allow that to happen with the Federal Reserve.”

DeMint here is referring to S604, the Senate counterpart the Ron Paul/Alan Grayson Amendment (HR 1207), which recently passed 43-26 in the House Financial Services Committee, much to the fear of Federal Reserve itself.   DeMint’s intentions here call the bluff of many who would call upon even more regulation and oversight of all aspects of our economy:   Evidently there are still plenty of elected officials who are not comfortable with this oversight extending to certain government agencies.

Lastly, it is well worth noting that voters who agree with DeMint’s worldview can thank The Club For Growth for helping him and other liked-minded individuals get to Washington.    The Club’s legal ability to advertise itself is outrageously limited (perhaps this is Washington’s notion of limiting government).   Anyone wanting to see DeMint’s perspective advanced in Washington should encourage and support similar candidates,  and the Club’s track record in getting that done is impressive.   In the never-more-important war of ideas, having candidates who will reliably legislate from the limited-government side is correspondingly crucial.

Mr. Dimon is correct for one simple reason: When there is the perception of risk with a trading counterparty, risk management will arise to deal with that risk.   Due diligence with regards to understanding the counterparty will increase in proportion to the perceived risk.   In the extreme case, risk management may dictate that the trading (however simple or complex) may not take place at all. Note that “trading” in this case is not simply what everyone envisions on some Wall Street trading floor, but the very essence of any transaction between two individuals.

The absence of “too big to fail”, and the extra due diligence that would have instead been present, would likely have prevented the entire housing-related financial debacle we’re all living through, including the current hand-wringing about what to do about it.

When a firm is deemed “to big to fail”, anyone trading with that firm is afforded the luxury (or trap) of letting their risk management guard down.   “Hey, my counterparty’s existence is a sure thing — why should I care what they’re doing behind my back? — It can’t affect me.”   The story of the Norwegian town of Narvik illustrates this perfectly.

With truly free trade, two potential trading partners, X and Y, will only trade if they make each other better off.   To do that, they must know each other’s needs.  Say X and Y are contemplating a transaction, but X is deemed “too big to fail” by some trusted third party — ie, 100% trustworthy in their ability to fulfill their obligation to Y, and/or of their ongoing existence.   Trading partner Y now has far less need to understand trading partner X.   In some ways, rather than Y needing to exhibit reciprocity in its care for its trading partner, it can act more selfishly, focusing more so on its own gains.   Knowing that X’s continuation is a sure thing, Y might not even feel entirely obligated to honor their obligation to X — “If I don’t, what difference will it make to them?”   This, combined with lax bankruptcy penalties, might have been all that was needed to prompt some people to stop paying their mortgages as their houses went “upside down”.

Amongst the chain of players in the housing market, note the prominent role of Fannie Mae and Freddie Mac, two institutions that were generally thought of as “too big to fail”.   Any mortgage originator who could raise product in a way that could conform to Fannie or Freddie’s securitization requirements could lay off whatever risk they initially had to  these organizations.   They were therefore incentivized to raise as much product as they could, earning commissions and short term compensation along the way, knowing that anything Fannie or Freddie did downstream was irrelevant.    Loans to borrowers with sketchy credit profiles?  No problem!  Sell ‘em off to Fannie or Freddie!   This is exactly what occurred with firms such as Countrywide Financial.

Suppose that Fannie and Freddie did not have their implicit government guarantee, or political pressure to assist in expanding home ownership.  They would then have been far more concerned with the quality of the collateral they were purchasing.    This would have rippled all the way back to the origination of the loans, because the resulting loans would have been less marketable, and in many cases, perhaps not marketable at all.

However, there would have still been a role for risk-takers to provide a valuable service to the market, in the form of making higher interest loans (to compensate for the risk) to higher-risk borrowers, and NOT selling the loans to a third party.   But there would have been an important difference.  It would be the free market and private decision making, as opposed to a political process, determining where on the risk-reward curve the business activity would be.

Mr. Dimon also does not mention the massive instructional benefit of failure.   While failure in and of itself is generally not pleasant to watch (perhaps with this exception), it is invaluable as a teaching tool.   It allows all non-participants to learn in a way that is every bit as valid as those who did participate:  Watching someone burn himself on a hot stove doesn’t require me to touch the stove as well to learn not to touch it.   Simply knowing that people can burn themselves on hot stoves is enough to make me cautious and treat the stove with respect.     This country needed to witness failure of lending to unqualified people to ensure that such poor business practices did not expand in scope.   Failure of unqualified borrowers to obtain credit is not evidence of a broken free-market.  It’s direct evidence of the market working!

If failure were permitted to happen in an unhampered fashion, private defense against possible failure of trading counterparties would necessarily increase.   There would be no need for a regulatory agency to try to outthink the market as a whole (an impossibility, yet one that many people sadly think is possible), because out of their own self-interest in self-preservation, companies would do it themselves.    Even still, there may be opportunities for private firms to arise that would add additional risk-management services in the form of wider information visibility and/or better analysis.   There is simply no need to politicize the function.  Claims that companies self-policing themselves have failed ring hollow because the necessary punishment of true corporate failure was not present.

A politicized version of the crucial risk-management function produces things like forcing a bunch of firms to take TARP money, even those who don’t need it, to shelter the identity of those who do.    Discovering these weakened firms faster and more unambiguously is exactly the kind of information that market participants (companies AND individuals) need to correctly perform their risk assessment.   Simply the threat of being put on such a list would be enough to keep an honest company concerned with the best interests of its customers off the list.

And this is exactly where we’d wind up.  Financial stability, security and trustworthiness would rapidly become the aspects that financial service companies would compete over.   Large financial institutions would have to prove to their customers that they are conducting themselves in ways that make their customers comfortable in trading with them, lest they watch these customers go elsewhere.    Not with some phony “too big to fail” claim, backed up with a politicized redistribution of private wealth, but with honest and verifiable proof using their own resources.    It’s already started, with small and regional banks running ad campaigns highlighting the fact that they didn’t take TARP money.  It’s a trend we need to encourage.