Don't Look Now -- Banks Are Still Ruining America: 6 Harsh Lessons from the JP Morgan Fiasco

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2. The big banks know that even if they get caught and fail, we will bail them out. JP Morgan, so far, has not taken down the entire financial system with its bad bets. But that’s more by luck than by design. We still don’t know the full extent of its losses. Everyone knows, however, that JP Morgan Chase will be rescued by the taxpayer should things get rough. There is zero chance that we will allow it to fail. How would you approach gambling in Las Vegas if you knew that your losses would always be covered?

3. Too big to fail also means too big to regulate. There are dozens of regulators who are “embedded” in JP Morgan Chase as well as the other large banks. That means that each day these federal regulators walk into their offices at JP Morgan Chase and pore over the books. Yet, they didn’t spot this casino until it already failed? That should tell us that Dodd-Frank can never handle these too-big-to-fail banks. The bill itself is now too big to implement, thanks to Jamie Dimon and his tireless lobbying efforts. Together the big banks watered down the bill and are now trying to drown it. But even a perfect bill would be impossible to fully implement in banks that are larger than large countries.

(Fox News, of course, is all over this angle. It’s a great chance to attack the Obama administration and regulations in general. But they have no solution other than letting the free market decide what’s best. That ought to really scare the big banks!)

4. To close the casino, the big banks must be broken up. There is no way to reform a too-big-to-fail bank without breaking it up into much smaller pieces. No bank should hold more than $50 billion in assets. Banking should be a public utility designed to aid the economy, not to enrich its biggest gamblers. It’s supposed to turn savings into investment, not into a craps game. And as long as they're too big to fail, they're gambling with other people's money. (A return to fully separating commercial banking from investment banking is a good start. But the separated banks also would need to be dramatically reduced in size.)

5. The JP Morgan crisis makes the case for a financial transaction tax. Big banks gamble in part because they have more money than they can profitably invest in firms that produce goods and services in the real economy. This excess money becomes their gambling stake and it makes them itchy to place their bets. The answer is to make each and every transaction more costly through a financial transaction tax – basically a very small sales tax on securities of all shades and colors. You want to write credit default insurance? You pay a small transaction tax that takes away a good deal of your potential profits. You want to buy a derivative, sell it, buy it again and then swap it for another? Then each transaction will cost you. This kind of tax would suck about $150 billion a year out of Wall Street putting downward pressure on financial salaries and bonuses. (The National Nurses United union is leading a campaign for this gambling tax. You can join the effort at www.robinhoodtax.org.)

6. Cap all bank compensation packages. For a very short while during the crisis our political leaders got religion about Wall Street incomes. They understood that bubble profits were based on fantasy finance that evaporated during the crash. The resulting damage and bailouts led to salary caps on bailed-out companies. But as soon as the banks returned the overt TARP bailout money, the caps disappeared. That was a huge mistake. They needed to be made permanent. Or if you want to be more fair-minded, the caps should stay in place until the unemployment rate returns to 5 percent.