now believes that this equation of the private interest with the public interest has gone too far. In fact, he, like Greenspan, has come to the view that it was a mistake even to think that bankers would be skilled at defending their own interests—that the markets could, as the prevailing theory had it, regulate themselves. At a British parliamentary hearing in May 2011, Kohn testified, “I placed too much confidence in the ability of the private market participants to police themselves.”
COGNITIVE CAPTURE
The Fed’s excessive faith in the bankers it regulated was caused by a phenomenon Willem Buiter has dubbed “cognitive state capture.” Like Carney, Buiter is no wild-eyed flamethrower. A former academic economist who served on the Monetary Policy Committee of the Bank of England, Buiter has himself joined the ranks of the global super-elite: born in Holland and possessor of British and American passports, since 2010 he has been chief economist for Citigroup. But in a paper delivered at the Federal Reserve’s annual economic conference in Jackson Hole in August 2008, Buiter argued, “The Fed listens to Wall Street and believes what it hears, or at any rate, the Fed acts as if it believes what Wall Street tells it. Wall Street tells the Fed about its pain, what its pain means for the economy at large, and what the Fed ought to do about it.”
Buiter readily admits that during the financial crisis “Wall Street’s pain was indeed great—deservedly so in many cases.” But he asks, “Why did Wall Street get what it wanted?” His answer is cognitive state capture.
“It is not achieved by special interests buying, blackmailing, or bribing their way toward control of the legislature, the executive, or some important regulator or agency, like the Fed, but instead through those in charge of the relevant state entity internalizing, as if by osmosis, the objectives, interest, and perception of reality of the vested interest they are meant to regulate and supervise in the public interest,” Buiter explains. “There is little room for doubt, in my view, that the Fed under Greenspan treated the stability, well-being, and profitability of the financial sector as an objective in its own right.”
With hindsight, some of the leaders of the Fed during those years have become openly repentant. As Kohn said at the British parliamentary hearing, “I have learned quite a few lessons, unfortunately for the economy, I guess, in the past few years.” He added later, “I deeply regret the pain that was caused to millions of people in the United States and around the world by the financial crisis and its aftermath.”
On Wall Street, though, the need for a more assertive state is not obvious. And if Dimon expresses this point of view with particular passion, that may be because he is one of the bankers who has the most right to it: he was, after all, one of the few CEOs who was actually pretty good at self-policing. Under his stewardship, JPMorgan, which is essentially a creature of Dimon’s deal-making genius, deftly avoided many of the most toxic assets that wrecked the balance sheets of other Wall Street firms. Dimon’s JPMorgan was strong enough to help Tim Geithner, then head of the New York Fed, in March 2008 by saving Bear Stearns (admittedly at a fire sale price); Dimon even left his own star-studded fifty-second birthday party to make the transaction happen. Dimon insisted from the start that his bank took the TARP bailout money only as a favor to the Treasury, which worried that unless the rescue was collective it would further stigmatize Wall Street’s weakest players. In 2009, the
All of which not only adds to Dimon’s natural cockiness (he, too, is another largely self-made plutocrat, who ascended from Queens to Wall Street via Harvard Business School), it fuels his conviction that business will do a better job running the economy if the government, with its burdensome rules, stays out of the way.
Hence, a few months before his dispute with Carney, Dimon enlivened a public question-and-answer session in Atlanta with his own regulator, Fed chairman Ben Bernanke, by warning of the dangers of higher capital requirements. For one thing, Dimon argued, “Most of the bad actors are gone.” For another, he cautioned, in an inversion of the Charlie Wilson line, that what was bad for JPMorgan would be bad for the country as a whole. “I have this great fear that someone’s going to write a book in ten or twenty years, and the book is going to talk about all the things that we did in the middle of the crisis to actually slow down recovery…. Has anyone bothered to study the cumulative effect of all these things [regulations] and do you have a fear like I do that when we look back and look at them all, that they will be a reason it took so long that our banks, our credit, our businesses, and most importantly job creation start going again? Is this holding us back at this point?”
That wasn’t the first time Dimon went public with his skepticism of the government’s ability to manage the economy. In January 2010, at the hearings of the Financial Crisis Inquiry Commission in Washington, D.C., he said, “My daughter called me from school one day and said, ‘Dad, what’s a financial crisis?’ and without trying to be funny, I said, ‘It’s the kind of thing that happens every five to seven years.’ And she said, ‘Then why is everybody so surprised?’”
That couldn’t be more different from Mark Carney’s worldview. He obliquely dismissed Dimon’s daughter anecdote in Berlin nine months later, not referring to Dimon by name but alluding to his remarks and charaterizing the attitude they betrayed as “jaded.” Carney asked why the rest of us “should be content with the dreary cycle of upheaval” the unnamed bank CEO had described. In the Washington speech he delivered forty-eight hours after his direct clash with Dimon, Carney challenged what he called Wall Street “fatalism” head-on: “In no other aspect of human endeavor do men and women not strive to learn and to improve. The sad experience of the past few years shows that there is ample scope to improve the efficiency and resilience of the global financial system. By clarity of purpose and resolute implementation, we can do so. The current reform initiatives mark real progress.”
Carney also took on another shibboleth of the banking lobby—that new rules would make little difference because they would always be arbitraged away. This is a polite way of saying bankers and their lawyers will always outsmart their regulators. It is a familiar poacher/gamekeeper argument—you can make the same point about terrorists and security regulations—with the added oomph of money and meritocracy. With bankers outearning their regulators by more than 100 to 1 (the ratio of Dimon’s salary to Bernanke’s), surely the bureaucrats will be hopelessly intellectually outmatched?
The gap appears not just in the pay slips but in resources. One White House official who had earned as much as $5 million a year in the private sector was dismayed to learn he was expected to fly economy class to meetings in Asia, a significant discomfort and one that, at more than fifty, he felt made it hard for him to do his job. On a trip from Washington to New York in the spring of 2011, CFTC (Commodity Futures Trading Commission) officials took the Megabus (thirty dollars per person round-trip), rather than Amtrak or the Delta shuttle, saving more than a thousand dollars. To avoid the cost of hotels, SEC staffers sometimes try to squeeze in trips to New York, where most of the banks they regulate are based, into a single day. In the movies the underdog on the bus beats the plutocrat on the private jet, but it is hard to see why that should happen in real life with any regularity.
Carney, who earns $500,000 a year, less than one-twentieth the 2011 compensation of Canada’s most highly paid Bay Street banker, explained why bankers’ outsmarting the system only made regulation even more important: “New and better rules are necessary, but not sufficient. People will always try to find ways around them. Some may succeed, for a while. That is why good supervision is paramount. Rules are only as good as the supervisors who enforce them, and good supervisors look beyond the letter of the rules to their spirit.”
Eight months later, Dimon inadvertently bolstered Carney’s case. On May 10, 2012, JPMorgan revealed that a trader known as the London Whale had made a bet on credit derivatives that went sour, leading to a loss of at least $2 billion, and which analysts close to the bank believed could rise to $6 billion. Wall Street, led by Dimon, had spent the previous three years warning that Washington’s regulatory overreach was stifling the financial system. The London Whale’s trades suggested that the real danger was still too much risk. As Congressman Barney Frank put it, “The argument that financial institutions do not need the new rules to help them avoid the irresponsible actions that led to the crisis of 2008 is at least $2 billion harder to make today.”
In the fight over capital requirements, the bankers would be delighted if the Fed returned to its Greenspan- era reliance on market self-regulation. But the bigger issue of the relationship between plutocrats and the state can’t be reduced to business battling for smaller government. Often, a big, intrusive state is the plutocrat’s best friend—true of state capitalist regimes like China and Russia and of industries, like the defense business, that live
