Too Big to Fail Meta-Post- UPDATED

Watching Up with Chris Hayes this morning on MSNBC, and he has a panel talking about the JP Morgan $2 Billion loss and the Volcker rule, etc.  I love the way Matt Taibbi looks at this, as my readers might suspect:

If you’re wondering why you should care if some idiot trader (who apparently has been making $100 million a year at Chase, a company that has been the recipient of at least $390 billion in emergency Fed loans) loses $2 billion for Jamie Dimon, here’s why: because J.P. Morgan Chase is a federally-insured depository institution that has been and will continue to be the recipient of massive amounts of public assistance. If the bank fails, someone will reach into your pocket to pay for the cleanup. So when they gamble like drunken sailors, it’s everyone’s problem.

Now I've never worked in the Finance industry and I obviously don't understand the intricacies of hedging and credit defaults and the rest.  But I understand the meta story: really big banks have been making risky trades, which often make them and their traders enormous amounts of money.  But any business that allows one to make billions of dollars can also cause one to lose billions of dollars.  In the case of the finance industry, these large institutions are so important to the economy and their failures so catastrophic to the rest of us, that our government can't allow them to go under.  That's why the bailout of 2008 was necessary- the recession would have been much worse if the bailout hadn't been initiated.  So we have a system in which upside risk is privatized in the form of huge salaries and bonuses for traders and bank executives, and downside risk is all on the taxpayer, who can't afford to let the banks fail.

So we have to regulate somehow, but it's really hard because these businesses and trades are really complex.  And bankers are really smart people.  And regulators make about 1% of what bankers and traders make, so the smartest people are obviously going to become the bankers, while the less smart people are going to have to settle for being government regulators.  They can't keep up.

So here's the meta-answer: Banks have to be less profitable.  That's what they're fighting of course, as they lobby against the Volcker rule and other regulations of Dodd-Frank.  They keep making the argument that we're making it much less profitable to be a banker- and they're right!  That's the whole freaking idea!  But they're trying to convince the public that gargantuan profits can keep emanating from the finance sector while risk is controlled.  But as all my friends in Finance keep telling me, you can't make a lot if you don't risk a lot.  We have to force TBTF banks to risk less, make less, and be more stable.  I don't know the industry well enough to figure out how to do that, but I know that if we're successful, it should piss off the bankers.  That means we're doing it right.

UPDATE: A correspondent emails me to say that it would be foolish to mandate that banks become less profitable. Of course he's right- that's not what I'm trying to suggest. Rather, my point is that any effective regulation will necessarily lead to banks being less profitable, as their profitability is inextricably linked to their riskiness. But I didn't mean that the government should do something so leadfooted as to mandate a limit on profit. Just that the regulations we need will lead to less profitability.