J. P. Morgan’s hiccup

Ooops. JP Morgan, one of the countries largest banking firms had a minor hiccup last week according to New York’s Mayor Bloomberg. One of the country’s largest banking firms somehow “lost” somewhere between 2 and 3 billion dollars in some shell game masquerading as high finance.

That sounds like really bad news for JP Morgan–or maybe not. The “Wall Street Journal” is suggesting that the company will most likely turn this loss into a gain. J.P. Morgan had authorized the repurchase of some 60 million shares in an effort to raise the value of the remaining shares. Because of the bad new of the billions of dollars lost in this derivative deal gone bad, the value of shares in the company on Wall Street has fallen by more than $10. J.P. Morgan will probably quickly buy up those now discounted shares and save a bundle on their repurchase. Even more of the billions in losses will be offset by gains on other deals and the company will be able to recover some of the loss as tax savings.

One would think an executive in charge when his company lost the equivalent of the gross domestic product of a small country would be filing for unemployment. Not Mr. Dimon. He is still CEO of J.P. Morgan. He has lost nothing. He and others making millions and billions from buying and selling debt and “investment products” to one another will continue to take home billions of dollars of rewards.

Last year, for the first time in our country’s history, financial capital accounted for more of our gross domestic product than did labor. This means that money made more money in our economy than did people’s labor and the things they produce.

That may not seem like a big deal, but it really is. If being a hedge fund manager is the new way to achieving the American Dream, our country and it’s economic base is in trouble.

Yes, money has always made more money. It has just never made as much as it does now. Our production of real goods accounted for most of our economy’s growth. Money was invested in production and when the goods were sold at a profit, there was a return on investment based on the production of something real, either someone’s labor or the production and sale of some product.

The economic shift to rewarding hedge funds and debt shuffling is creating an upside down economy which is not sustainable.

If I go to the bank and borrow $10,000 to buy a used car and the bank bundles this loan together with others, makes a little profit on the deal, my bank is happy. The financial institution they sold these loans to can either keep collecting borrowers’ payments assuming we will pay back our loans with interest or they can sell these loans to another institution for part of the anticipated profit and the next bank also makes a little profit. These bundles of debt are sold and resold and bundled with even more loans and sold again. Every time they are sold a little more profit is siphoned off. If you buy enough of these “products” the little bit off each one amounts to a big amount. The risk involved is that some of the people who originally borrowed the money don’t pay it back. Some bundles are riskier than others and are sold together with safer bets. One has to wonder how it is that this kind of financing can produce the astronomical profits and salaries currently being realized. Where does the billions of dollars circulated through the pockets of the huge financial corporations such as J.P. Morgan and others come from? Does it magically appear somewhere between my borrowing $10,000 for my car and Jamie Dimon’s paycheck?

The astronomical earnings of overpaid hedge fund managers and corporations like J.P. Morgan come out of the rest of the economy. They are paid for by the interest paid by you and me and by the profits of our work. Just as in any game of chance, there are always winners and losers.

This game is not sustainable because there is nothing real holding it up. It is not a free market. It is not an inevitable outcome of capitalism. It is a rigged game and when the tower topples, it will be those of us at the bottom that will pay the bills.

If big financial institutions win the bet and make money, someone else along the line has lost money. We’ve already experienced that with the collapse of the mortgage bubble. Derivatives were bought and sold so many times that no one knew anymore what they were really worth. They were being sold for more than they could possibly earn. On top of that the housing market started to go bad and more borrowers defaulted than anticipated. In spite of needing to be bailed out by taxpayers and stockholders, the largest banks have grown and become even more profitable while homeowners were left holding the empty bag.

Encourage our elected representatives in Washington to change the rules of the game and put realistic controls on the financial sector.

Copyright © 2012 Janet Jacobson and Sustaining the Northern Plains