Dimon's timely message about financial fragility

The most honest investment advice ever given was to a liftboy sharing a ride with the original JP Morgan. Asked what the market was likely to do that day, the great banker pondered a moment before responding, "It will fluctuate, my boy, it will fluctuate."

History does not record the boy making a fortune from these words. Unpredictable fluctuations are a sign of markets doing their job, which includes denying a killing to the casual punter. Its other key role is as shock absorber. Popular mythology portrays the City trader as a braying fool who heedlessly jerks prices around for the sake of it. But much as this may revolt the man in the street, traders provide market depth, an evident social good. The more they stand willing to buy or sell, the less the risk of disruptive volatility.

Contradicting their image as economic wrecking balls, it is often banks that perform this service. As well as smoothing the day-to-day, they have stepped in at moments of historic panic - none more so than JPMorgan Chase itself. Its eponymous founder helped rescue the US Treasury in 1895, and also cobbled together the funds that stemmed the turmoil of 1907. Ninety years later, it joined a Wall Street syndicate that shored up the collapsing hedge fund Long-Term Capital Management. (The significant missing names were Bear Stearns and Lehman Brothers, two of the first casualties of the crisis.)

Moments like these belie the slur that depicts bankers only lending an umbrella when the sun is shining. But Jamie Dimon, the current boss of JPMorgan, now warns that the next crisis will see the banking sector no longer able to respond, sapped of flexibility by years of tightening regulation. There are good reasons not to dismiss this as mere special pleading. In Mr Dimon's own words we now have "a banking system that is stronger than it has ever been", stuffed with capital, awash with liquidity and rid of the exotic time-bombs that once littered the balance sheet. The problem is regulations that encourage banks to rush for cover at the first sign of a storm.

Market makers' inventories have been slimmed down by rules against proprietary trading. Higher liquidity and capital requirements encourage hoarding. Banks that once saw a panic as a buying opportunity will sit on their hands. Replacements such as long-only funds are untested, and the evidence from last October, when US Treasuries lurched about like a penny stock, is against any transition being smooth.

Mr Dimon proudly described JPMorgan as an "endgame winner" - a bank that used its diversified mass to survive the crisis without a loss. But the volatility he warns of is a direct consequence of this same brutal endgame. Once, his bank would have faced many competitors of similar heft across its markets. Now there are often just a handful, and those remaining are programmed to scarper when the going gets tough.

The existence of global systematically important banks - of which JPMorgan is measured as the most important - highlights a lack of what Nassim Nicholas Taleb describes as "anti-fragility". These behemoths are strong but taken together constitute a system hobbled from responding flexibly to the unexpected.

Resolved never again to sink taxpayer cash into the financial sector, governments have taken determined steps to stop the events of 2008-09 from reoccurring. But financial crises never reoccur. The next one will be different, and Mr Dimon has suggested that when it comes banks like his will not be organising a rescue mission. If he is unable, and governments unwilling, the next panic could find ordinary investors well and truly on their own.

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