Jamie Dimon is just doing his job, which is why it is more important than ever that Ben Bernanke do a better job at his.Dimon, JP Morgan Chase & Co Chairman and CEO, staged an unusual confrontation with the Federal Reserve chairman at a conference in Atlanta on Tuesday, drawing a line between tighter banking regulation, heavier capital requirements and slow growth and joblessness.“Has anyone bothered to study the cumulative effect of all these things?” Dimon asked.“And do you have a fear, like I do, that when we look back and look at them all that they will be a reason it took so long that our banks, our credit, our businesses and most importantly, job creation, started going again?”Well Jamie, I have other fears that outweigh yours; that you, your bank and others like it will use your positional advantage to extract wealth from the economy which exceeds, on a risk-adjusted basis, the value you add. What’s more you will do so by arbitraging a government guarantee that will allow you to make profits all the while building risks that, when they explode, will become taxpayer liabilities.The very nature of his question, with its overtones of holding the economy hostage, are evidence of the unsavoury and unacceptable relationship between finance and the rest of the economy.Dimon was reacting not just to the patchwork of new regulation enacted since the crisis, but to recent proposals for higher capital weightings. Fed Governor Daniel Tarullo last week said the Fed was considering capital requirements that could end up being more than double those envisioned under the international Basel III plan. Also on the table is some form of extra capital weightings that would penalise banks based on their size. This, meant to encourage too-big-to-fail banks to slim down, is a dagger aimed directly at Dimon and JP Morgan’s unfair advantage.It would impair his profits, and, as Dimon argues, would hit the economy.He’s exactly right, of course: higher capital requirements and better supervision will crimp economic growth, perhaps imposing a lower ceiling on the booms we have grown to love and fear. After all, the freely available credit of 2006 created many jobs, from originating no-doc mortgages to fitting marble bathroom fixtures.There are two problems with this type of growth; it is a wasteful misallocation of resources, and also the growth is ephemeral. Financial crises are hugely damaging, and as we are seeing, the recovery is long and painful. That is an illness which more bank intermediation will not cure.It’s Bernanke’s job to recognise that he is not charged with creating growth at any price, but at fostering sustainable growth. That means tough banking regulation, aggressively enforced.Even beyond the issue of too-big-to-fail there are real questions over how large a financial system is actually beneficial to an economy. Because the US subsidises finance, through deposit insurance, mortgage support and in many other ways, this is an appropriate area for government control.A recent paper by economists Jean-Louis Arcand, Enrico Berkes and Ugo Panizza explores the relationship between the effects of financial development and economic growth. http://www.voxeu.org/index.php?q-node/6328While there is little doubt that finance is important in an economy, the authors found that after a certain point the effects of more financial intermediation are actually negative for growth. The high-water mark is when credit to the private sector is 110 percent of GDP; after that our banks are, in effect, a tax, privately levied but publicly paid.All of the major economies are above that 110 percent threshold. The US is among the most debt-ridden, with credit to the private sector at more than 200 percent of GDP in 2009, according to World Bank data.On that basis, higher capital requirements and tighter regulations are an unalloyed good. Growth may be lower at times, but there will be less of the ruinous ups and downs. Importantly too, the fruits of growth will be more fairly shared out, between industry and government, among industries and among individuals.“They’re concerned about their return on equity, and I’m concerned about the safety of the banking system and the American depositor and taxpayer,” Thomas Hoenig, the president of the Federal Reserve Bank of Kansas City, told American Banker. http://www.americanbanker.com/issues/176-108/hoenig-basel-tbtf-future-1038513-1.html?zkPrintable-1&nopagination-1“All the safety net has done is allowed them to leverage up to their advantage on the backs of the American taxpayer. I have a hard time as a person, who is more concerned about the safety of the system and the taxpayer, to worry about their position.”This is exactly the approach Bernanke should take.At the time of publication James Saft did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund. You can e-mail him at jamessaft[AT]jamessaft.com and find more columns at http://www.reuters.com/news/globalcoverage/columns