Stephen Foley: Bernanke remains scholar and gentleman


US Outlook: Jamie Dimon is on the board of the New York Federal Reserve and a power player on Wall Street. He has no shortage of opportunities to make diplomatic overtures behind the scenes to the central bank and to its chairman, Ben Bernanke. His question to Mr Bernanke this week was therefore a deliberate public ambush. Has the Fed "bothered" to study the effect of Wall Street reform on the economic recovery?

Unlike Mr Dimon, Mr Bernanke is a gentleman and proffered the intellectually honest answer that it would be impossible to make such a study, given the scale and diversity of the new rules.

He could have matched the JPMorgan Chase boss for belligerence. No, Mr Dimon, we have not tallied the economic cost of Wall Street reform – but why don't we talk a little about the economic cost of having no reform at all.

We know what an unreconstructed Wall Street costs us. The financial crisis can be measured. Global trade plunged more than 10 per cent in the final three months of 2008, after the Lehman Brothers collapse and subsequent panic, and then 30 per cent the quarter after. That did not need to happen.

Financial crises make for much harder economic recoveries than typical recessions, according to Ken Rogoff and Carmen Reinhart's definitive academic study. Per capita income takes four or four-and-a-half years to recover. Unemployment tends to recover only after four years. US income is likely to be $600bn (£370bn) to $1.2 trillion lower this year than if the economy had kept growing at trend levels.

Measures such as higher capital requirements, living wills for systemically important financial institutions and measures to disentangle banks' derivatives operations from each other make it less likely there will be another credit bubble, another bust, another panic.

No one should imagine we can go back to the easy credit of the bubble era, no bank shareholder should imagine these will be go-go stocks again, and no bank boss should imagine he can go back to the bumper profits and mega-bonuses of that era, either. I've said it before, and Mr Bernanke said it this week: the longer the list of Mr Dimon's gripes, the happier we should be.

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