The business news while I was gone was dominated by two big stories: JPMorgan’s loss of $2 billion ($5 billion? $6 billion?) in an exotic derivatives bet gone wrong, and the much-hyped IPO of Facebook, which quickly spiraled into disaster. Here’s what they have in common: The mania for unearned riches from foolish behavior. As with peak oil, just because we reached Peak Fool in the housing bubble, it doesn’t mean we’re out of foolishness. It will just be more costly, whether for JPMorgan shareholders and depositors (and potentially U.S. taxpayers) or those who bought Facebook stock hoping to make a killing.
Facebook is a nice toy for reconnecting with schoolmates or stalking old girlfriends or boyfriends, and Mark Zuckerberg sure looks cute in the now mandatory adolescent uniform of business, but does any sane person believe this is a company that could justify a market cap of nearly $100 billion? It could only do so in a casino economy where idle capital — and the savings of average investors looking for unearned riches — can be sucked in quickly before reality intervenes. Only the insiders and sharpies get rich.
Sure, the initial public offering was botched in many ways. But ultimately, this isn’t 1999.
The JPMorgan scandal is more troubling, because it shows how vulnerable the banking system remains just four years after similar dodgy schemes blew up and nearly took down the world economy, requiring huge government bailouts and resulting in a long-running economic slump that barely avoided (for now) becoming another Great Depression. JPM Chief Executive Jamie Dimon has been the most vocal critic of serious efforts to re-regulate the industry and break up the Too Big To Exist banks, such as JPM. Don’t you just wonder what remains to be revealed about the JPM acquisition of Washington Mutual?
In any event, the only way to protect taxpayers and the economy is a new Glass-Steagall Act that prohibits federally insured institutions from gambling with derivatives, swaps, etc. etc. and acting as investment banks. And outlawing, or taxing to the gills, most of these derivative swindles. What is a bank doing making bets? Otherwise, only the insiders and sharpies get richer while the rest of us get poorer.
The big problem with Peak Fool is the opportunity cost. Imagine if these billions were actually provided as loans to start or expand real businesses, or invested in enterprises that created products and jobs with real value in the world economy? It won’t change until the incentives are changed. Until then…suckers!
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Today’s Econ Haiku:
It was 108
In Phoenix, in May, no hoax
Climate change is here