Thursday, May 24, 2012

JP Morgan Is Proof That Markets Work Without More Regulation

From The Washington Times, "J.P. Morgan’s risky business: Loss logic: Market discipline beats government regulation" by Nita Ghei:
Even if the final damage tally reaches $5 billion, J.P. Morgan still will be in the black, with profits of $25 billion. The company’s assets are valued at $2.3 trillion, so the firm’s missteps are far from fatal with such a massive diversified portfolio. The only losers from this bad deal are the people who, if it had gone the other way, would have reaped the rewards: the J.P. Morgan employees who set up the deal and the investors. Instead, heads rolled within a week at J.P. Morgan, and the firm lost some of its value and reputation.

That’s exactly how financial markets are supposed to work. It is a risky business. The same people who stand to earn the rewards must bear the risk. The notion of a risk-free, error-free market is fundamentally flawed. Some trades inevitably will go wrong. What is important is to make sure that third parties - such as taxpayers - aren’t stuck with the bill when that happens. The alternative is to do what Congress did in 2008: bail out banks, breaking the link between risk and reward.

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