Nobel Prize-winning economist Paul Krugman on Monday said that JPMorgan's misstep underlines the need of regulations against banks' risky speculations.
History tells us that banking is and always has been subject to occasional destructive "panics," which can wreak havoc with the economy as a whole, Krugman noted in his latest column article on The New York Times.
JPMorgan Chase, the largest US bank by assets, disclosed about 2 billion U.S. dollars of trading loss last week. The blunder, which is said to be the result of some complicated hedge fund trading, shook confidence of the bank and recharged a debate about the 2010 financial overhaul law, a regulatory law to rein in risky investments.
Jamie Dimon, the chief executive of JPMorgan, has been outspoken in fighting against financial reform, especially the so- called Volcker Rule which is yet to be finalized and would prevent banks from engaging in proprietary trading.
Krugman noted that banks' misfires in investment are different from money-losing mistakes made by businessmen, because the risks banks take are borne, in large part, by taxpayers and the economy as a whole.
"What JPMorgan has just demonstrated is that even supposedly smart bankers must be sharply limited in the kinds of risk they're allowed to take on," he added.
"On one side, the scope for panic was limited via government- backed deposit insurance; on the other, banks were subject to regulations intended to keep them from abusing the privileged status they derived from deposit insurance," while recalling the system involving both guarantees and oversight in the 1930s, the economist said the United States needs to restore the sorts of safeguards to prevent banking panics.
JPMorgan's case is an "object demonstration" of why Wall Street does, in fact, need to be regulated, Krugman added.