When Washington is on the brink, who has the clout to persuade legislators to keep government open? The obvious answer is the US president. A better one is Jamie Dimon, chief executive of JPMorgan Chase. With last week’s vote in doubt, Mr Dimon helped to arm-twist Congress to pass a bill to keep the Federal government running for most of next year. What a splendid public service, I hear you say. In fact, his motive was more specific. The bill included an unrelated item allowing banks to resume derivatives trading from their taxpayer-insured arms. That ban is now history. Who other than a Wall Street titan could demand — and receive — such a service?

More than six years have passed since the collapse of Lehman Brothers triggered a global meltdown. Never again would Wall Street be allowed to write the rule book for itself, said Washington. To some degree, its wings were clipped. Big banks lobbied fiercely against parts of the 2010 Dodd-Frank reform act. In many cases they failed. Thus, Washington now has a consumer financial protection agency. The Federal Reserve has imposed a ceiling on Wall Street’s leverage ratios. Banks must put many types of derivatives through a central clearing house. Under the Volcker rule they must keep proprietary trading separate from their deposit taking mother ship.

Many of these reforms count as progress — particularly the leverage limits. Moreover, in some cases Wall Street has reason to complain about over-reach. Banks are not special pleading when they point to the escalation in regulatory costs since 2010. Washington has more financial regulators than sense. Often they are penny wise and pound-foolish. Banks’ compliance departments have swollen to keep pace with an avalanche of micro-regulations that few believe will do anything to reduce overall risk. The aftermath of 2008 is by no means a simple tale of Wall Street running rings around Washington. Yet — as Mr Dimon’s intervention showed — high finance is recapturing whatever sway it lost.

David Fuller's view

Here is the FT article.

Many of these reforms count as progress — particularly the leverage limits. Moreover, in some cases Wall Street has reason to complain about over-reach. Banks are not special pleading when they point to the escalation in regulatory costs since 2010. Washington has more financial regulators than sense. Often they are penny wise and pound-foolish. Banks’ compliance departments have swollen to keep pace with an avalanche of micro-regulations that few believe will do anything to reduce overall risk. The aftermath of 2008 is by no means a simple tale of Wall Street running rings around Washington. Yet — as Mr Dimon’s intervention showed — high finance is recapturing whatever sway it lost.

Subscribers bring up this important topic from time to time and it will always remain interesting.  For further insight regarding 2008, I think we need to go back to at least December 5th 1996, when Federal Reserve Chairman Alan Greenspan gave a speech at the American Enterprise Institute, thoughtfully titled: The Challenge of Central Banking in a Democratic Society.  Here was the key sentence: 

“But how do we know when irrational exuberance has unduly escalated asset values, which then become subject to unexpected and prolonged contradictions as they have in Japan over the past decade?”

It was an intelligent question but Greenspan’s “irrational exuberance” remark was widely castigated by financial market representatives, journalists and even some politicians, who all questioned whether he had overstayed his welcome at the Federal Reserve. 

Intimidated and chastened by this onslaught, Greenspan lost both his nerve and his judgement as Chairman of the Federal Reserve.  To my recollection, he never publicly mentioned irrational exuberance again. 

What Greenspan should have done, I maintain, was keep inflammatory thoughts of irrational exuberance to himself, while commencing a gradual raising of US short-term interest rates, to cap the stock market bubble which was inflating. 

Instead, Wall Street spiralled out of control with the tech bubble, which burst in 2000.  That calmed markets down for a few years before the more sinister and dangerous derivatives contracts bubble led to the crash of 2008. 

These were governance problems which no regulator could have controlled, in my opinion.  However, a strong central banker with a very good understanding of what was occurring on Wall Street could have capped the 2000 and 2008 bubbles much earlier.  Meanwhile, some members of today’s Fed are concerned that a gradual increase in US short-term interest rates has been delayed for too long. Moreover, no one looking at the chart above would consider Wall Street undervalued.