Most Scragged authors are technologists or professionals of one sort or another. Sorrowfully for our lifestyles, we are alas not Wall Street bankers, so we aren't completely confident that we can tell a banking genius from one who is merely highly competent.

Fortunately, there are more authoritative sources on that subject. Although they aren't favorably inclined towards bankers just now, the New York Times magazine published a largely favorable article about Jamie Dimon, the C.E.O. at J. P. Morgan Chase. The Times made a number of points about Mr. Dimon which suggest that he's probably a banking genius:

He fulfilled a banker’s first obligation: he made sure his bank survived.

When markets melted down and the economy plunged into recession, J. P. Morgan remained not only solvent but profitable every quarter.

Instead of reviewing brief summaries of the bank’s operations, as his predecessor had, Dimon demanded to see the raw data — hundreds of pages detailing J. P. Morgan’s businesses every month.

Instead of simply trusting his traders, Dimon put himself through a tutorial, so that he would understand the complex trades the bank was exposed to.

put himself through a tutorial, so that he would understand the complex trades the bank was exposed to. Rather than run its mortgage machine at full throttle for as long as possible, Dimon reined in lending earlier than did others and warned his shareholders of looming trouble.

reined in lending earlier than did others and warned his shareholders of looming trouble. When other banks were refusing to lend, Dimon’s continued to offer credit to customers ranging from homeowners to Pfizer to the State of California.

When the United States needed a strong institution to bail out a failing bank, it turned — twice — to JPMorgan Chase.

“You go in his office, there is almost nothing on his desk,” says Steve Black, a longtime colleague. “He reads it and remembers."

He nixed the most aggressive type of mortgages, known as option ARMs, on which borrowers were hooked on an initial low teaser rate.

As depositors fled from weaker banks, J. P. Morgan took in an additional $180 billion.

Since he arrived at J. P. Morgan, in 2004, the company’s stock is flat, a dispiriting result that the directors surely didn’t anticipate. His achievement can be measured in terms of the trouble he avoided — the average bank stock, over that time, is down by half.

Why list so many points? Partly because these are quotes from the Times, which is no friend either of banks or of big businesses, and partly to show that Mr. Dimon is indeed a talented, broad-spectrum bank leader who at least borders on genius. His economic performance gives him enormous credibility in the banking business and in Washington, so his ideas matter.

We're writing about him because his vision of the range of financial products which banks ought to be allowed to offer makes us very nervous.

To oversimplify, Mr. Dimon believes that money is just another commodity which can be bought and sold like anything else:

“Walk into a Chase branch and we can give you so much quicker, better and faster, Dimon says, referring to the bank’s array of loans, credit cards and investment products. “Like Wal-Mart.” It is an intriguing comparison; this is how Dimon wants to be seen — as a retailer with 5,200 branches nationwide whose products happen to be financial services. The reason that J. P. Morgan runs so many disparate businesses, he says, is that they aren’t really disparate. Just as customers in Wal-Mart shop for groceries as well as televisions, people who want credit cards also need mortgages; small businesses that require commercial loans occasionally need an investment banker; and all of the above need a place to put their assets.

Banks are so important to the economy that we need banking rules which help them stay sound and keep them from risking collapse. Most everybody we know agrees with that, the question is, precisely what rules would give us the best combination of low risk and rapid economic growth?

Money: Just Another Product?

Mr. Dimon asserts that money is just any other product such as lettuce or cucumbers which vendors ought to be permitted to buy and sell in any way they find convenient. To be fair, a great deal of our financial system is based on treating money just like any other commodity.

Consider wheat futures. A farmer who plants his fields has no idea what the wheat price will be in the fall. If the price is low, he'll lose money; if it's high, he wins big. The farmer faces enough weather risk that he doesn't want to also take on risks about the future price of wheat.

Instead, he looks for someone who wants to take pricing risk off his hands. The farmer sells a speculator a contract to deliver so many bushels of wheat not now, because he doesn't have the wheat, but in the fall after the harvest. The speculator buys a "wheat future" which the farmer sells.

So long as the speculator doesn't go under, the farmer is guaranteed a certain price for the wheat. If the price is higher when the farmer delivers, the speculator makes a profit; if it's lower, the speculator loses. The speculator takes on the pricing risk the farmer didn't want to handle.

Oil prices are changing so rapidly that homeowners are writing checks in the spring to pay their heating oil company for "future oil" to be delivered during next heating season. Whether this saves them money or not, it shifts the risk of high oil prices from the homeowner to the oil company. The oil company is more interested in delivering oil than in speculating in it, so the company takes the money and buys "future oil" from a speculator. The speculator has taken on the risk of oil price changes which neither the homeowner nor the oil company want.

A Loan Is a Sale of Future Money

Loans work in exactly the same way as commodity futures contracts, but loans deal in future money. Suppose the bank loans you $100 and you agree to pay $10 per month for 12 months. After a year, the bank has its money back and $20 more. Instead of calling it a loan, we could say that for $100, you sold the bank a commitment to deliver $120, spread out at $10 per month. You've sold future money just like the farmer sold future wheat and the speculator sold future oil.

The bank isn't as worried about the price of money changing over the course of a short-term loan as the farmer is as worried about wheat prices because changes in the value of money, which we call "inflation" or "deflation," don't usually happen all that fast. Thus, when you take out a short-term loan as in borrowing $100 for a year, the bank isn't worried that money will go down in value enough to wipe out their profit.

Changes in the value of money affect other businesses which operate over longer time spans, however, or which deal in larger amounts.

Suppose that Japan Air Lines orders a Boeing 747. When the plane is delivered in several years, JAL will pay Boeing $300 million or so.

JAL is headquartered in Japan and keeps their corporate accounts in yen. How many yen will it cost them to give $300 million to Boeing several years from now? The value of the yen against the dollar fluctuates all the time, who knows what the exchange rate will be that far out? If the yen is high, JAL will get the airplane for fewer yen than planned which increases their profits. If the yen is low, the plane costs more yen than expected which hammers profits.

There are enough risks running an airline. JAL isn't interested in also taking on foreign exchange risks, any more than the farmer wants to take on the risk of wheat price changes. Instead, JAL goes to a speculator who promises to deliver $300 million on the date specified in exchange for a certain amount of yen today. Thus, JAL has bought future dollars to pay for their future airplane and shifted the foreign exchange risk to someone else.

Future Money and Future Risk

All the fancy financial products which caused so much trouble - mortgage-backed securities, ARMs, derivatives - are just different ways of packaging the process of buying and selling money and risk, either now or in the future. Mr. Dimon is unusually good at this, so he wants the freedom to invent new financial products to add to his product line just as Wal-Mart is free to add new kinds of toys or food to their product line.

The way he describes it, being able to market new financial products sounds like a good idea, particularly because of economies of scale. As Wal-Mart has sold more and more products in more and more stores, they've been able to keep their costs down which is reflected in their prices. When JP Morgan took over Wa-Mu, the larger bank saved nearly $1 million per year per branch by consolidating expenses. To Mr. Dimon, the bigger and more integrated we let his bank get, the more benefits we'll receive.

This sounds very good and to a large extent, it is good. However, with all due respect for Mr. Dimon's track record in managing a huge bank extraordinarily well, we must disagree with him. We do not believe that it's a good idea for any single institution to offer too many different financial products. The next article in this series explains why.