The free market has been called a profit and loss system. In the real world all investments involve imperfect knowledge. No one knows with certainty in advance how much risk is too much in a given investment, and no one knows with certainty when one is throwing good money after bad. After all, sometimes losses are indeed temporary, and sticking with it until things turn around may be the prudent thing to do.
Before the fact, estimated profits and losses help us (imperfectly) to tell good choices from bad. After the fact, actual profits and losses tell us whether we were right.
When JPMorgan has done well in the past, and evidently until this recent episode it had been doing well relative to other banks, it made profits. But in this last instance it appears that it chose poorly and that it and its investors are suffering the consequences. The fallout for some of JPMorgan’s executives seems to have begun. And as reported, the firm has already lost a $15 billion chunk of its market value. Again, that’s what’s supposed to happen.
The financial industry in the United States is far from a free market. Contrary to the impression you might get from the popular press, it’s not a playground for freewheeling capitalist buckaroos. But to the extent that free-market principles apply, neither losses from error nor profits from good decisions are in themselves grounds for “tighter regulation.” Rather, those are precisely the means by which people who trade in the free market regulate one another.
In a free market, failure is always an option.