By Daniel Indiviglio The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Is the Federal Reserve too complex to manage, too? That’s usually a question for big banks like JPMorgan, recently humbled by a surprise trading loss. But it’s also not a bad one for the Fed.  From the presence of JPMorgan boss Jamie Dimon on the New York Fed board to the U.S. central bank’s forays into housing policy, the Fed seems to be pleasing no-one.

Part of the Fed’s problem is that it wears many hats. Among many functions, it serves as a bank advocate and lender of last resort while supervising banks. It also oversees systemic risk, worrying about looming global macroeconomic disasters. And of course, it sets U.S. monetary policy, hoping to control inflation. Its mission also requires it to aim for maximum employment.

As far as monetary policy goes, Fed Chairman Ben Bernanke is caught between some Democrats who think it should flood financial markets with even more cash as a form of economic stimulus and Republicans who fear inflation or just think too many dollars have been printed.

The Fed, not surprisingly, has critics on many other fronts too. For example, on Tuesday three liberal senators unveiled a bill that would ban bank executives from serving on regional Fed boards. The proximate motivation is the suddenly flawed Dimon’s board seat at the New York Fed. The senators worry about a conflict of interest since the Fed regulates and lends to JPMorgan and its peers.

Those on the right, meanwhile, clamor for different reforms. Last week barely half the Republicans in the Senate voted to confirm Jerome Powell, himself a Republican, as a Fed governor. That smacks more of GOP maverick Ron Paul’s preference for getting rid of the central bank altogether.

Meanwhile, others worry the Fed’s efforts to rehabilitate the economy have led it into policy debates generally reserved for Congress – like recommending that government-owned mortgage companies Fannie Mae and Freddie Mac should forgive mortgage balances.

By Daniel Indiviglio The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

JPMorgan’s whale is proving big enough to change the tide of regulatory reform in Washington. After nearly two years of haggling between lawmakers and the banking industry over details of the sprawling Dodd-Frank Act, a round of significant final alterations were finally ready to be implemented. But after U.S. senators ripped into regulators on Tuesday, it became evident that any clear rules look beached for now.

The loss of at least $2 billion from JPMorgan’s chief investment office temporarily silenced some critics of financial regulation. Those arguing the bank could manage its own risks without the government’s firm hand, including Chief Executive Jamie Dimon himself, are all devouring crow. Lobbyists are rewriting playbooks as any sympathy from politicians to go easier has quickly vanished. Less than six months from elections, members of Congress are unsurprisingly reluctant to look soft on Wall Street.

There are some strong, tangible signs that Washington’s reset button has been pushed. A meeting to put the finishing touches on revisions to new Dodd-Frank derivatives rules, which had at long last been coasting toward passage, was unceremoniously postponed by a House committee shortly after JPMorgan disclosed its blunder.

A previously scheduled Senate Banking Committee hearing about swap rules implementation on Tuesday went on as planned, but turned into a showcase for the new congressional tone. Democrats demanded to know how regulators could better prevent such disasters. Republicans pressed Commodity Futures Trading Commission Chairman Gary Gensler about why he learned about JPMorgan’s trading losses from the press instead of oversight.

The criticism and rhetoric on display at the meeting was only an opening act. More regulators are due to appear in early June. And then shortly thereafter Dimon will be hauled up to the Hill, so the government can try to figure out what exactly broke down in the regulatory and risk management processes. This time it only cost JPMorgan shareholders; no one wants taxpayers on the hook next time. Any fixes to new rules, no matter how well meaning, are now bound to get another look. And the delays to financial regulation today only mean it will probably be tougher tomorrow.

By Daniel Indiviglio The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

JPMorgan has given financial reformers at least two billion reasons to insist on more aggressive oversight of the banking industry. In the wake of last week’s trading loss, presidential contender Mitt Romney and other Republicans will have to rethink their rhetoric around gutting the Dodd-Frank Act and, more specifically, its Volcker Rule provision. Voters may no longer believe that big banks can manage their own risks, which leaves making banks smaller the alternative to tighter regulation.

Jamie Dimon reiterated over the weekend that JPMorgan’s loss at its chief investment office came from mistakes made hedging its loan portfolio. The trading led to more – not less – risk. But portfolio hedging isn’t the sort of activity limited by the Volcker Rule, which is meant to prevent banks from betting with capital secured by customer deposits. Still, that hedging went awry. While the bank’s capital can handle the hit, the episode has critics rightly complaining that even a bank as seemingly bullet-proof as JPMorgan is too complex to manage its own risk.

And that presents a political problem. Dimon has been outspoken about the flaws of Dodd-Frank, and Republicans have largely nodded in agreement. Presidential hopeful Mitt Romney has promised to repeal much of the 2010 law if elected. This episode shatters that strategy. The GOP shift may already have begun. On Friday, Senator Bob Corker called for a hearing to learn more about JPMorgan’s loss and what such mistakes mean for taxpayers. As recently as February, he was pushing to weaken the Volcker Rule.

Republicans will need to come up with a strategy to end too big to fail without increasing the government’s footprint in finance. If embracing Dodd-Frank is not an option, do not be surprised to see many in the party adopt a more radical idea, and one embraced by Dallas Fed President Richard Fisher: breaking up the banks.

By Daniel Indiviglio The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

The lessons of the U.S. mortgage crisis seem to be lost on policymakers tackling student debt. A decade ago, government subsidies and guarantees helped expand the “dream” of homeownership to many Americans who would have been better off renting. Today, it’s college education being made more accessible with cheap funding provided by Uncle Sam.

The U.S. Congress, which rarely agrees on anything these days, is achieving quick consensus on the matter. Without action, interest rates on student loans, which are unsecured, are set to double in July. But lawmakers have been scrambling all April to find a way to collect more revenue or cut spending to maintain subsidies and keep the rates down.

The effort is all too familiar. Government mortgage guarantees, accompanied by encouragement to make the American Dream available to lower income and less creditworthy borrowers, sent home prices soaring at an inflation-adjusted annual rate of 8 percent over the decade ending when they peaked in late 2006, according to Yale economist Robert Shiller, whose name adorns a closely watched home price index.

The price of college has been growing near that rate for even longer, according to College Board data. Over the past 30 years, private nonprofit college tuition and fees, after adjusting for inflation, have increased 6 percent annually. Public university prices have grown at 9 percent.

Like homeownership, college education has been exploited as a moral good. Anyone aspiring to earn decent wages needs a degree these days. Even jobs that haven’t traditionally required such academic training, like police work, now do. This shift has pushed the average student loan balance up by 25 percent annually over the last decade, according to finaid.org. These debts now exceed $1 trillion, more than even enthusiastic U.S. consumers have accumulated on their credit cards.

Ultra-cheap loans too often encourage young adults to start their working lives with excessive debt. And it’s the federal guarantees that prime the pump. To curb the unsustainable growth in higher education costs requires scaling back the government’s involvement. There’s still some time to keep student debt from turning into a mortgage-like crisis, but probably not much.

By Daniel Indiviglio The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

The dramatic $700 billion bailout of U.S. banks calmed markets and helped stabilize the financial system, but that doesn’t mean taxpayers will see any direct returns from the investment. The Treasury says the Troubled Asset Relief Program might turn a profit. But the agency’s fuzzy math wouldn’t fly with any sensible portfolio manager. What it calls a gain looks more like a loss of at least $230 billion.

Treasury’s rosy projections aren’t half as bad as its methodology. The government declares a return when an investment’s payments exceed the initial cash outlay. That boldly disregards the cost of money and its value over time.

By contrast, consider Warren Buffett’s bet on Goldman Sachs. In the thick of the crisis, he loaned the bank $5 billion in exchange for 10 percent annual interest and stock warrants. Goldman paid back the Oracle of Omaha a few years later. Though hanging on to the warrants may cost him in the end, even without them he booked an annualized return of 14 percent.

Compare that to TARP, which had seven broad components. Start with the banks. Treasury estimates an ultimate profit of $22 billion. Even if that’s achieved by year’s end, taxpayers will have earned a paltry annualized return of 2 percent. Simply investing in the S&P 500 index would have earned 14 percent a year. Worse, applying Buffett’s Goldman return as the risk-based cost of capital turns the net present value of the bank rescue into a loss exceeding $15 billion.

Then there’s Fannie Mae and Freddie Mac. Treasury says its “loss” may shrink to $28 billion in a decade, generously assuming that profits from the giant mortgage backers will exceed housing-bubble era averages. Even using that questionable projection generates a net present value loss of $88 billion. Tabulate automakers and AIG similarly, figure a $28 billion loss on mortgage backed securities Treasury bought and sold, and accept Treasury’s estimated $46 billion loss on foreclosure programs and its $3 billion gain on its flop of a public-private toxic asset scheme – and it all adds up to a whopping $230 billion loss, adjusting for the cost of capital.

Even using a more conservative discount rate of 10 percent would still leave the loss at over $190 billion. The U.S. Treasury isn’t a hedge fund, so was willing to invest poorly for the bigger, unquantifiable return delivered by stability. But rather than try and obscure the painful price tag of its rescue, it should be emphasizing that avoiding a global meltdown was worth the cost.

By Daniel Indiviglio 

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.  

The holy grail of foreclosure prevention looks near struggling homeowners’ grasp – but its contents may taste bitter to taxpayers. The Federal Housing Finance Agency appears close to caving on letting Fannie Mae and Freddie Mac cut mortgage balances for underwater borrowers. A new Breakingviews calculator shows that this policy shift would not cost too much more at the margins. But it introduces another layer of moral hazard: if it encourages enough borrowers to sip from the cup, Frannie’s already gargantuan $150 billion bailout tab could almost double.

If properly targeted, forgiving lump sums from borrowers’ mortgages isn’t overly expensive. FHFA Acting Director Edward DeMarco revealed last week that 700,000-odd government-backed, underwater borrowers already in default might qualify. Their balances could be cut by an average of $51,000 a pop.

Plug those numbers into Breakingviews’ calculator, along with Barclays’ assumption that redefaults may hit 40 percent, and it shows that principal forgiveness costs $9 billion more than the projected cost of Treasury’s original Home Affordable Modification Program. That initiative shrinks a borrower’s monthly payment without reducing balances. Forgiveness is more expensive – while it usually pushes redefault rates down by five to 10 percentage points, according to Barclays, it cuts mortgage principal and interest revenue.

Frannie would, though, get a boost from the Obama administration, which has offered to use leftover bailout money to pay an incentive of up to 63 cents for each dollar of principal cut. The firms say that makes reducing loan balances $1.7 billion cheaper than traditional HAMP modification. That’s bogus math for taxpayers, of course – they provide the funds either way.

The real problems start if borrowers who are deeply underwater but still paying their mortgage demand principal relief. Some 2 million homeowners fall into this category, the FHFA says. Factoring those in and assuming none of them defaults, the calculator shows that slashing loan amounts would cost taxpayers a whopping $128 billion more than just rejigging payments.

By Daniel Indiviglio

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Washington may just hold a $23 billion fix for the nation’s cash-strapped states. That’s the upper limit of what could be raised if local governments were allowed to tax online retailers, according to the National Conference of State Legislatures.

Unfortunately, a pre-Internet court ruling currently forbids states from forcing sellers to collect such tariffs. That’s why last week Georgia became the latest state to resort to contorted ways around the rule. But a federal solution would be better – and luckily a bipartisan group of senators appears to have hit on one that even giant web retailer Amazon supports.

That’s no mean feat. The online mega-store has been a vocal opponent of earlier attempts to introduce a tariff on web purchases. The problem stems from a 1992 Supreme Court ruling calling for a federal directive to force out-of-state vendors to collect sales tax on mail orders. So in most states the onus is on the consumer to pay up, which means no one ever does.

To date, only individual states have tried to kick-start the process, as Georgia did last month. They argue that advertising and links with locally based affiliates effectively created an on-the-ground presence which made their wares liable to be taxed. But these schemes were often only aimed at the largest retailers and would constrain their ability to work with local companies.

Congress’s Marketplace Fairness Act avoids those pitfalls. It also eschews the flawed origin-based model, which would tax sales in the state where a cyberstore is based. That would mean some states would collect levies grossly out of proportion to the size of their population.