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Patrick Watson of Mauldin Economics delves into the hypocrisy of JP Morgan Chase CEO Jamie Dimon warning of the dangers of socialism

Patrick Watson of Mauldin Economics delves into the hypocrisy of JP Morgan Chase CEO Jamie Dimon warning of the dangers of socialism
Image: Wikimedia Commons.

By Patrick Watson*

Jamie Dimon, CEO of JP Morgan Chase (JPM), which just marked the most profitable year any US bank has ever had, spoke on CNBC from Davos last week.

His topic: The dangers of socialism.

According to Dimon, socialism’s core problem is that it misallocates capital. Governments make inferior decisions when they own the means of production.

He’s not entirely wrong, but the irony is rich. Jamie Dimon has spent most of his career misallocating capital. That’s why he is wealthy. He’s still doing it right now, and Donald Trump is helping.

They aren’t against socialism at all. They embrace socialism when it suits their purposes. The just-inked US-China trade deal is a prime example.

Bailing out China

Jamie Dimon may not like socialism, but he loves President Trump’s “Phase 1” China trade deal… which is weird, if you think about it.

The deal gives US banks greater access to what they believe will be a lucrative financial services market.

But China’s Communist government directly owns many Chinese businesses and dominates the rest. According to Dimon, this should have had terrible results. Yet the Chinese economy grew anyway—to the point that Dimon wants a piece of the action.

On the other hand, much of China’s growth came from crazy amounts of debt, which is beginning to cause problems.

Beijing needs solutions. Trump’s deal just gave them one.

China will now let US companies buy non-performing loans directly from Chinese banks, greatly simplifying a previously costly process.

Or, said another way: Chinese state-owned banks will get to dump their capital misallocations on American investors who think they can make the bad loans profitable.

Can they? We’ll know in a few years. If we get another banking crisis first, you and I might have to bail out the people who bailed out China.

So, far from resisting socialism, Jamie Dimon and the Trump administration want to help socialists clean up their balance sheets. But that’s not all.

(Image: Pxhere).

Mismanaged trade

President Trump took office promising to restore “fair trade” between the US and China. He said, correctly, China had broken the rules.

Fairness would mean the two governments give each other’s businesses the opportunity to compete. Consumers then decide what to buy.

The Phase 1 deal isn’t about allowing opportunity; it pre-determines the outcome by, for instance, China pledging to buy large amounts of US goods.

Is buying these US goods the best business decision for the Chinese purchasers? Is selling the goods to China (instead of someone else) the best for US exporters?

That doesn’t matter. The two governments decided how it would be. Story over.

In other words, what Trump calls “fair trade” involves governments making the kind of capital allocation decisions Jamie Dimon says governments always screw up, and which lead to socialism. 

This isn’t free trade or fair trade. It is managed trade, with politicians as the managers. Which is problematic when the politician-in-chief’s business experience consists mainly of driving companies bankrupt and stiffing lenders.

(Image: Wikimedia).

'Commissars on your board'

Dimon seems oddly oblivious to his own words. Here’s a snippet from that Davos interview.

I don’t want to talk about any particular people but if you’re talking about governments controlling corporations that’s socialism.

You can do it in a small way or a big way. The small way is to put a commissar on your board, remember the old Russian commissars could sit in the room or do it through regulatory or stuff like that the other way is that they actually own the company. Look at all the other countries and they start to take over the oil companies and the steel companies and utility companies.

And the banks. The banks start making loans not to good companies, not because they are properly allocating capital to its highest and best use, but to keep that factory open. The bridge to nowhere to make sure the mayor doesn’t lose jobs in his town and once you do that you will have an eroding society.

Having said all that it doesn’t mean that things don’t need to be fixed. They need to be fixed inner-city schools, infrastructure, education, healthcare. We could fix all of those.

Dimon actually loves all the things he criticizes in this quote. JP Morgan Chase exists today only because “commissars” (i.e., taxpayers) bailed it out. It makes “bridge to nowhere” loans every day. Dimon doesn’t mind as long as he gets repaid with interest.

Meanwhile, Trump thinks “governments controlling corporations” is a great idea.

If you fear socialism, relying on politicians like Trump, or bankers like Dimon, to stop it is a big mistake. They like socialism, or at least some of its features.

Dimon says “we” (presumably he means faux capitalists like himself) could fix things like education, infrastructure, and healthcare.

Is that true? Maybe. But as of now, US crony capitalism mostly leaves these problems to the government, which under present leadership mostly ignores them.

This creates an opening for actual socialists like Bernie Sanders to propose solutions. Whether theirs will work any better is not yet known. But in politics, something usually beats nothing.

All of which adds up to my conclusion.

Worrying that America will turn socialist is pointless. The kind of socialism Jamie Dimon thinks so terrible is already here.

So if we’ll have socialism in any case, the main question is who benefits from it.

Presently, the rewards mostly go to a small number of people like Jamie Dimon, many of whom stood in the White House clapping as Trump signed Phase 1.

They had good reason to applaud. It was a winning deal… for them. What they really seem to want is socialism for themselves and capitalism for the rest of us.


*Patrick Watson is senior economic analyst at Mauldin Economics. This article is from a regular Mauldin Economics series called Connecting the DotsIt first appeared here and is used by interest.co.nz with permission.

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55 Comments

Looking for background reading, contemporary.

Victor Davis Hanson (a number of books to sort through).
The case for Trump
https://www.amazon.com/Case-Trump-Victor-Davis-Hanson/dp/1541673549

Located in the fiction section I presume...

No, but that's probably why you haven't read it yet.

Long form for the weekend.

Here is Douglas Murray and Riger Scruton working through the issues.

https://youtu.be/uu5T3sWAg0w

Great read and the msg cuts through to me. Whenever a run-of-the-mill wingnut starts raving about the evils of socialism, I listen but I find it all very frustrating. These are usually the people who think leaders such as John Key represent capitalism in all its glory. It's tiring and woefully ignorant. I learn more about real capitalism from the citizens of countries like Vietnam (hence the irony) than the aforementioned in NZ and Australia, both of which seem to run more like planned economies which many of the general public confuse for capitalism.

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Socialism - Govt knows better than individual, so Govt has all the resources.
Capitalism - Individual knows better than Govt, but Corporate's have all the resources.

Either way the individual is stuffed.

Reality is all economies are a mix. We as a democracy get to choose that mix. Some things are best run by the government, and some things work well with a free market.

New generation of political leaders are no longer categorising the world by ideology or xxxism.

True leaders view the world and humanity as a whole with deeply connected fate and a shared prosperous future, such as President Xi.

wow - its amazing people think or speil stuff like this

Look out kids, Dont follow leaders, watch the parking meters...

The more you seem to be surprised, the more you need to catch up with this rapid changing world and update your knowledge around it.

the mainstream western media has been serving as a barrier for you to understand the world and as an illusionist for you to misunderstand it at the same time.

You continually rail against "western media" yet you seem to follow the CCP line pretty consistently. Do you trust them over a free press, however flawed?

Free press? Hahaha, I am sure that you are not that naive about the world around you.

The mainstream western medias are controlled by less than six capital groups. They feed information to manipulate people like you and ham n eggs and many others in this forum.

And you are enlightened by news from CCP? Amazing

Having spent long time in NZ and exposed to many mainstream media (CNN, BBC, Financial Time, New York Times, NBC etc), I would have trusted these so called "free press" far more than CCP's media if they report only some unbiased truth about China.

On the contrary, the China that they have been reporting is soooooooooooooooo different from the China I observe from my own eyes.

....and. Just because the Western press is giving a distorted view of China it doesn't follow that China is giving a non distorted view of the West to it's internal readership nor that the reporting of what is happening internally is not biased / distorted. Just saying.

Isn't that true of every country and every media? My life today like most days consisted of meeting friendly pleasant people, chatting, eating, ablutions, a little gardening, etc. None of that is in the news. Not even my driving uneventfuly from place to place. The news is what is interesting: deaths, destruction, unexpected fortunes, enormous corruption, etc. So when the BBC, New York Times, German and Swedish media concentrate on the destruction of some muslim cultures as a reaction to terror attacks it is news but it is only about 1% of the Chinese population so not likely to be seen by you. Your eyes will be noticing new cities, new roads and a big middle class spending on luxuries. However both that good story and the cultural genocide are true. Both in their own ways documented by Chinese media and international satelite pictures. It is much easier for the media to ask Trump hard questions than it is to ask Xi Jinping anything even slightly tricky.

Like China’s financial system is soooooooooo different, it’s opaque.

"True leaders view the world and humanity as a whole with deeply connected fate"

So celebrate with us, the world... this:
https://edition.cnn.com/2020/01/28/politics/house-passes-tibet-human-rig...

TIBET TIBET TIBET.

How many people does he lift out poverty ?
How many school, hospital, road, rail, bridge, electricity generators, residential buildings, toilets does he build?

On the other hand, he and his class slaved, slaughters tortured thousands of Tibetan slaves before Liberation Army entered Tibet in 1952. The army saved thousands and millions of Tibetans out of Dalai Lama and his class's slavery.

We never got to find out how they would have developed, since the Chinese occupation that happened there since 1950s. But I sponsored Tibetan Refugee Children and they are now going on to major in Business Studies, this is really the next generation of leaders. Not Xi Jinping, the Party Secretary, he is older and traditional.

I'm very pleased to have been able to help them, if you can't help many, help just one.
Since sponsoring a little girl and a little boy through their education, I am very pleased to be celebrating human rights for TIBET.

May this warm your heart and see that China can learn also. Everybody is different, accept that. You focus on the struggle, you will be the struggle.

Hooray for the return to monarchs! One person surely knows best!

I see Putin is now being anointed the "Supreme Leader of Russia"...finally cementing his own belief into the minds of others too.

It's rather unbecoming, however, the tantrums these god-emperors such as Xinnie the Pooh, Trump and Putin seem to throw whenever anyone disagrees with them or fails to worship them.

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Socialism for the elite, capitalism for the crowd.

Good piece, cheers. There’s a reason younger generations are not scared of socialism, and one of them is that they’ve seen how happy capitalists are to socialise risk when it suits them. We still haven’t recovered from the GFC in that sense - it’s an open secret that our financialised economies are hopelessly compromised by ‘too big to fail’.

Of the places that have tried it, where is socialism succeeding. Jut list your top three places.

it's not 'socialist' or 'capitalist'. Most liberal democracies involve elements of both.
So:
New Zealand
Singapore
Finland

It's like you've missed where the debate is actually taking place. The debate is not in this century between Fascism and Communism but about different flavours of social democracy.

You don't see anyone on NZ's Right arguing for the abolishing of the universal pension regardless of need now, do you?

The younger generation isn't scared of socialism because they haven't seen its effects. There is nowhere anywhere that has truly prospered under socialism

Socialism is the precursor to fascism.

Nationalism is usually the precursor to fascism. Not sure what history books you've been reading.

Have your forgot to read about the National Socialist Party?

The Nazi Party has socialist elements, like introducing an aged pension, but their policies were not notably socialist despite their name. In fact they engaged in street battles with anarchist and communist groups throughout the 1930s.
You may have heard of that famous poem by Pastor Niemoller that people are fond of quoting, you know, ‘First they came for the...’ Read the actual poem and check out who they came for first. Hint: It wasn’t the Jews.

Yes, I’m going to tell you again to go and read a book, because saying that calling themselves National Socialists made the Nazis socialist by anyone else’s definition is astoundingly glib and ignorant.

Is that not whats happening here? First they come for your tax, then for your guns, then for your cars, then for your school curriculum.
https://www.econlib.org/library/Enc/Fascism.html

Sounds like you are being bewitched by American garbage to me. The best economic systems are mixed with both capitalist and socialist elements. No extremes work well or for long without force.
Nazi Germany started out neither here nor there where socialism/capitalism went, in fact they were fairly different beasts to what they seem to be today. The problem with fascism is it's racism and/or scapegoating, which does not favour any economic philosophy, but nests well with full on authoritarianism, you are not going to get a population turning a blind eye to what went on there unless they were too damned scared not to.
What Nazi Germany became was most certainly not socialist, there was no equality, and it was certainly not capitalist, there was no freedom, these sorts of regimes transcend economic philosophy, and I am finding it very disturbing that there is such a severe twisting of the truth of them in the name of god knows what out of the USA.
Does it not seem a little odd to you that once again we are seeing the rise of white supremacy (basically Aryanism) and the beginnings of scapegoating of other races/religions, and I can assure you, that is not coming from the left, as we tend to identify them today.

I think you need to read beyond the headlines

And nationalism and authoritarianism seem to go hand in hand as well.

... there's no truer words than " we are doomed to repeat our history , if we forget it " ....

New Zealand.
Check out the historical tax rates and level of direct gov't intervention in NZ in the 40s-70s... the period during which we built most of our existing infrastructure and were the most prosperous society on Earth. Rabidly socialist by today's standards.

What about Singapore? The majority of their housing is financed by the state. Imagine if Jacinda proposed that, you'd be calling her Stalin II. Socialism!!

And I don't see why I should have to justify socialist failures like North Korea any more than you should have to justify capitalist failures like Somalia or the Appalachians. The truth is that the most stable and prosperous nations operate capitalist economies with greater or lesser socialist elements bolted on, and the ones with big chunks of socialism attached tend to do better. Anyway, the greatest socialist going round in the States at the moment is Trump... can't even keep his hotels afloat without Gov't money, it's like something from Bulgaria in the 70s...

The 40s to 70s are not a good illustration of the benefits of socialism. We could afford the infrastructure because our terms of trade were sky high. Thank you farmers! However, that changed as it always does, and the government's think big infrastructure spending lead had us to within a whisker of going broke. People like to decry Rogernomics but a lot of the reforms weren't voluntary, we had the creditors knocking on the door.

It's a counterfactual we can't really answer, but we don't know that there would have been economic catastrophe without Rogernomics. Plenty of other Western countries were in a similar situation vis-a-vis inflation and debt at that time, and while most of them liberalised to a greater or lesser extent in that era, none went as far as NZ, and their economies did not collapse. NZ is basically a safe, stable nation to lend to... I don't think an Argentina situation was ever likely, but it suited the ideologues to act as if it were.

It's nothing like Bulgaria.
How are you feeling

https://en.m.wikipedia.org/wiki/Trump_derangement_syndrome

Foremost, great article Patrick.

As other have said the world is moving on from the crude narrative that socialism and capitalism are somehow antithetical. We want a prosperous society in which the benefits of industry are shares (a roof over every head and a meal on every table.) Young people are seeing that growth does not automatically benefit for all.

Growth within a bounded system benefits nobody, in the long term.

Where there is economic distortion; extreme salaries and wealth, fiscal policies are needed to redress a balance.

One can understand why it doesnt happen in the States; where most senators pamper to the elite (and in turn pampered by the elite).

High taxes for extreme salaries might just be a big part of the solution, to encourage better allocation of capital. It use to be this way, and still is in the Scandanavian countries.

The economic distortion we have here is one where productive labour is heavily taxed while wealth gained through unproductive land banking is taxed not at all. We have low achievement in productivity because we discourage it in favour of sitting on capital.

As someone said, afraid I can't remember who: the US is governed by millionaires, in the interests of billionaires.

This is starting to make sense. Either way, it's all about power, but it's how to be the most scrupulous since it's all turning the wheel increasing the chaos.

Its an interesting discussion of course one has consider that capitalism and socialism are simply different shades if grey along the same continium and in somecases can be quite similar. Where I do admire socialism is its ability to aggregate wealth to provide for the masses i.e. the public health system where as an entirely private system will only be accessible for the few. What I don't like about socialism is its tendency to become militaristic in some instances which then diverts resources to guns and tanks instead of health and education.

Seriously, you see the US as socialist?

Capitalism likes Socialism when the Capitalist One Percenters can control the 99 % of the Socialists.

Jamie Dimon and his bank alongwith Goldman Sucks benefited the most by the Bank bailout of 2008 (misallocaiton of capital ?) which left his competitors dead and vaulted his Bank and Goldman to the top 2 positions in the US. They have been benefiting since then continuously from the various government policies. In fact they are extensions of the government. Selective Socialism in the disguise of Capitalism.

I think everyone should read or reread the essays of that prophetic writer George Orwell, the author of "1984" and "Animal Farm", to put the Capitalism/Communism seeming dichotomy into perspective.
Totalitarianism is the thing to fear; it can arise from either a Capitalistic system (e.g. Hitler's Germany and maybe Trump's USA in the future ) or a Communistic system (e.g. Russia since the revolution and maybe Putin now; and,of course, North Korea and China).
Freedom from Totalitarianism is what the fathers and grandfathers ( maybe great-grandfathers by now ) of
most of us fought for in WW1 and WW11. You know, the soldiers we remember on Anzac day; they do still teach this at school....don't they!

Exactly. Authoritarianism can be capitalist or socialist... it's a shame so many people are too dense to get this.

Notice how good mixed economies tend not to be militaristic. And of course Pinochet's Chile was an enforced free market system