The Archive

THE INTERVIEW

Jamie Dimon warns of debt limit ‘panic,’ urges calm on China

Jamie Dimon is the most powerful man in global finance.

When the 67-year-old CEO of JPMorgan Chase speaks, captains of industry, finance titans and Washington tend to listen. When the U.S. government needs a private sector lifeline, it often starts with Dimon.

Which is why we took note in a recent interview when he warned about the potential for a financial market panic as the U.S. hurtles towards a debt default.

President Joe Biden and Speaker Kevin McCarthy have just weeks to reach an agreement to raise the debt limit. Treasury projects the U.S. could default as soon as June 1, and the two left a meeting Tuesday with little sign of progress, save another meeting scheduled for Friday.

But even getting this close to the brink could be catastrophic, Dimon told us.

“This can cause panic. And you’ve seen, panic isn’t necessarily a rational thing,” Dimon said. “People panic. And [when] you see people panic — that’s ’08, ’09 again, and that’s really what you want to avoid.”

The potential for a financial market panic is not something Congress can legislate away as the X-date draws closer.

“I think there’s a higher chance of a mistake here because of the politics of the situation,” Dimon said. He also echoed warnings from policymakers like Treasury Secretary Janet Yellen that plenty of economic damage could be done well before the U.S. hits the X-date.

Here’s more from Dimon:

Dimon finds himself in a familiar spot as the banking crisis looms — in the thick of it. He was a key player in the $30 billion private sector effort to shore up First Republic in March. And it was Dimon’s bank that ultimately bought the regional bank this month.

As CEO of JPMorgan Chase since 2005, Dimon is now the longest serving chief executive of any American mega-bank. He’s also the only CEO still leading the same mega-bank since the U.S. economy limped away from the 2007-2008 global financial crisis.

Dimon’s public profile isn’t just a consequence of his job helming America’s largest bank. JPMorgan boasts roughly $3.7 trillion of assets, not including First Republic — a deal Dimon closed after speaking with Punchbowl News.

It’s because few bankers, if any, have ever played such a crucial private sector role in economic crises past and present.

Overall, Dimon could do without the debt-limit dramatics. “I hope we avoid it,” he said, referring to default. “I hope, one day, we get rid of it,” Dimon added, reiterating his call for a permanent end to the debt limit.

Unlike the serious Obama-era fights over the debt limit, the banking system today is grappling with instability. Regional banks remain under stress.

But in contrast to progressives in Congress and other critics of Wall Street, Dimon argues that Trump-era deregulation has not played a key role in the banking industry’s latest woes.

“We don’t believe that the problem was caused by that change in regulation that happened a couple of years ago,” Dimon said. He was referencing the 2018 bipartisan bill that eased some regulations around mid-sized banks, including higher asset thresholds for the toughest bank exams.

‘Tough but thoughtful’ approach to China: Dimon supports a bipartisan congressional approach to China but wants to make sure things don’t get too heated.

“I think [Congress is] putting proper attention to the issue. Now, some people are overly shrill about it,” Dimon told us. “America has still got the best hand ever dealt of any nation on the planet. Take a deep breath, focus on the issues.”

Dimon said he’s spoken with “many” lawmakers and policymakers in Washington about economic policy and China, and he thinks “they’re there, they’re on it.” He specifically commended key Biden officials like National Security Adviser Jake Sullivan, Secretary of State Antony Blinken, Commerce Secretary Gina Raimondo and Yellen.

What needs to be done now, Dimon added, is “you’ve got to get into treaties and forms and private conversation” with China.

Dimon is essentially calling for an American approach to China that’s “tough but thoughtful.” That’s another way of saying Washington shouldn’t be aiming for full-on economic war with Beijing, even as global competition for resources heats up in the coming years.

Dimon says a thoughtful approach has to start with a recognition that China, for all its might, is “not a 10-foot-tall soldier” when compared to the United States.

Here’s more from Dimon on China:

One last thing: We’re in the midst of another months-long news cycle where economic pundits wonder whether the world is on the verge of moving away from having the U.S. dollar as the global reserve currency. We’ve even heard some criticism of the long-running phenomenon from Republicans like Sen. J.D. Vance (Ohio).

Dimon’s take: You’re going to miss dollar dominance if and when it’s gone.

“The strength of the mighty dollar is predicated upon the strength of the United States economy, the tacit authority of the Federal Reserve Bank and the openness” of the dollar, Dimon said.

“Anyone who wants to weaken the dollar would weaken those other things, and that would be a bad idea for America,” he added.

– Brendan Pedersen

THE DECODER

Wall Street isn’t freaking out about the debt limit. It probably should be.

If you talk to lawmakers and top leadership aides off the record, they say the only thing that might snap Capitol Hill into action on the debt limit is a precipitous drop in the stock market.

That’s not happening. But maybe it should.

President Joe Biden and Speaker Kevin McCarthy walked away from debt limit negotiations on Tuesday evening with no movement from either side, though they’ll reconvene on Friday.

The question remains: Why isn’t Wall Street freaking out?

Start with this: Biden raised eyebrows Tuesday night when he told the White House press corps he was “considering the 14th Amendment.” That’s a reference to a line that states the “public debt” of the United States “shall not be questioned,” which some wonks have suggested could be a way for the government to simply ignore a default.

Still, there are some warning signs, but mostly weak ones. The prices of short-term Treasuries are up, and longer-term Treasuries are down. That’s a signal that investors are nervous and willing to trade some profits for shorter-term security. And the price of credit-default swaps, a type of derivative that basically acts as an insurance policy against defaults, has swung way, way up over the last two months.

But a full-blown panic would look and feel very different from what we’re experiencing now. If we get there, expect sharp sell-offs across the U.S. stock market, if not an outright crash. Remember the financial market panic in 2011 after S&P downgraded the status of U.S. debt, better known as Black Monday?

Rep. Patrick McHenry (R-N.C.), chair of the House Financial Services Committee, is also a bit concerned about the lack of freakout from Wall Street.

There just seems to be a sense of inevitability floating around Wall Street. Sure, we’ve had our share of close calls in 2011 and 2013. But Congress needs a deadline to get stuff done, and it always uses up as much time as it can before sliding in right under the wire. Right? That’s the hope.

We asked several lawmakers what they thought of Wall Street’s blasé attitude toward the debt limit with less than a month before a potential default. The problem is that most lawmakers don’t think a default is on the table, either.

“I don’t think there’s a disconnect,” Sen. Mike Crapo (R-Idaho) told us. “I think we all understand the urgency and significance of it.”

Republicans say Treasury Secretary Janet Yellen’s warnings of an early June default are just a political ploy to spur Congress to act.

“I think you don’t see more concern because nobody believes that June 1 date,” Sen. John Kennedy (R-La.) said.

And Democrats are still betting Republicans will stop short of triggering a default, while blaming McCarthy for the ongoing standoff.

“I think we’re going to get through it without great damage, but I don’t know. Because McCarthy is a weak leader,” said Senate Banking Committee Chair Sherrod Brown (D-Ohio). “He really is more of a follower to the extremes of his caucus.”

When we asked Sen. Katie Britt (R-Ala.), she touted her support for the Full Faith and Credit Act, which would direct the government to prioritize “funding for our military, veterans and seniors” in the event of default. Several other Republicans have cited this so-called fallback as well.

One problem: The Treasury Department has said “prioritization” gimmicks were simply “default by another name.”

But there are other issues here, too. The White House just doesn’t understand McCarthy nor how to negotiate with him.

Plus, two-thirds of current House lawmakers weren’t even here for the fiscal showdowns of 2011 and 2013. And many House Republicans have openly doubted the catastrophic consequences of a default.

And McCarthy is dealing with a conference that’s even more unruly than the one former Speaker John Boehner had to corral a decade ago. McCarthy has just a four-vote majority, a demanding conservative flank and very little room to maneuver here.

– Brendan Pedersen and Jake Sherman

THE POWER MATRIX

THE OUTLOOK

Republicans’ war on financial regulators won’t end with the CFPB

In just a couple of years, the Consumer Financial Protection Bureau could be radically transformed by the Supreme Court or Congress. But what comes after that could have a larger blast radius for key financial regulators.

Top Republicans want to go beyond the CFPB, making more of the agencies responsible for the safety and soundness of the financial system subject to the appropriations process.

Plenty of regulators work with Congress every fiscal year to get their budgets. But look no further than the IRS to see how badly an agency can be hollowed out after being politicized. That’s a fate banking agencies would very much like to avoid.

“It’s really a question of accountability with these agencies, and whether they’re following congressional intent,” House Financial Services Committee Chair Patrick McHenry (R-N.C.) told us. “That’s at the heart of the conversation around putting these regulators on budget.”

The Supreme Court will hear a case challenging the constitutionality of the CFPB’s funding in its upcoming October term. The court’s conservative supermajority could strike down the framework that runs the agency’s budget through the Federal Reserve, which is also funded outside the typical appropriations process.

And Republicans are eager to wield the power of the purse over the CFPB. That likely means subjecting the agency to prolonged spending fights and potentially drastic budget cuts after years of relative stability.

For progressives, this is a five-alarm fire.

“It would absolutely affect the other regulators,” said Sen. Elizabeth Warren (D-Mass.), a key architect of the CFPB before being elected to the Senate.

In banking, the argument for independent regulation is that opening up financial agencies to budget squabbles could be dangerous if it impedes the government’s ability to respond to the next crisis. Democrats also argue that independent agencies are less likely to be influenced by lobbying from lawmakers or financial institutions.

Allison Preiss, a spokesperson for the CFPB, said in a statement that independent funding “is a vital part of the nation’s financial regulatory system, providing stability and continuity for the agencies and the system as a whole.”

Nearly all bank regulators receive most or all of their funding outside the appropriations process. Republicans have their eye on regulators at one place in particular — the Federal Reserve. Fed supervisors have come under significant scrutiny since the sudden collapse of Silicon Valley Bank.

Rep. Andy Barr (R-Ky.), a subcommittee chair on the House Financial Services Committee, has been fighting to bring the CFPB into the appropriations process for years. Barr is drafting a bill that would make part of the Federal Reserve — the arm that handles supervision and bank regulation — subject to the annual appropriations process.

“I believe in the importance of Fed independence on monetary policy,” Barr said. “But over time, especially with Dodd-Frank, the Fed has been given much greater supervisory and regulatory functions and responsibility. Those are functions and responsibilities that should be subject to political accountability.”

McHenry echoed Barr when we asked him about whether more regulators should be subject to appropriations.

“We have an independent central bank. That’s different than the supervision from the Fed,” McHenry said. “But the supervision piece, and the regulatory team — all these things should be on appropriations for sure.”

McHenry was adamant that Republicans don’t want to target agencies like the Federal Deposit Insurance Corp. and Office of the Comptroller of the Currency, which receive a lot of their funding through fees paid by their supervised banks. “Not on my agenda, not a part of the discussion at all, period,” he said.

But the broader push has support beyond the House. Sen. Thom Tillis (R-N.C.) told us that Congress should be “consistent” about which agencies are subject to appropriations:

This is a change progressives would fight viciously.

“The willingness to step up and do whatever it is that the regulator thinks is right, regardless of the political fallout — that’s what keeps our system safe,” Warren said. “And without that, we are all at much greater risk.”

– Brendan Pedersen