TRUMP, DIMON AND THE FINANCIAL CRISIS / BARRON´S MAGAZINE

Trump, Dimon, and the Financial Crisis

By Randall W. Forsyth   
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Photo: Marlene Awaad/Bloomberg 


In a week marking the 10th anniversary of the signal event of the financial crisis, who would have guessed the most amusing and inadvertently enlightening event would be a tiff between America’s preeminent banker and America’s chief executive?

Representing the lending side was JPMorgan Chase CEO Jamie Dimon. President Donald Trump heads the world’s biggest borrower, the U.S. government, and has more than a little experience with debt from his days as a real estate developer and casino operator. “I think I could beat Trump,” Dimon said of a match-up for president. He claimed to be as tough as Trump and “smarter than he is.” To top that off, Dimon added, “this wealthy New Yorker actually earned his money. It wasn’t a gift from Daddy,” alluding to the seed money that Trump received from his wealthy developer father.
Trump, of course, couldn’t let that go, tweeting that Dimon is unsuited to run for president since he “doesn’t have the aptitude or ‘smarts’ & is a poor public speaker & a nervous mess—otherwise he is wonderful.”

There’s a certain irony that, a decade on from the worst credit crisis in history, high-profile representatives of the financial class are at the pinnacle of the world’s power elite. What might be as surprising is that nobody has gone to jail over the criminal acts that brought on the crisis, from making fraudulent loans to the Wall Street machine that turned toxic mortgages into gilt-edged AAA securities.


The main narrative also remains that policy makers, from the Treasury to the Federal Reserve, did everything in their power to fight the crisis. To this day, officials (including former Treasury Secretary Henry Paulson contend that they couldn’t have prevented the demise of Lehman Brothers, the signature failure of the crisis.

That assertion is countered by Johns Hopkins economist Laurence Ball in his recent book, The Fed and Lehman Brothers: Setting the Record Straight on a Financial Disaster, in which he argues that Lehman had sufficient collateral to secure a loan from the Fed that could have saved it. The day after the Lehman bankruptcy, the Fed would rescue AIG, whose failure potentially could have had even more disastrous consequences.

The recovery since the crisis has largely been the product of the unprecedented monetary policies adopted to fight the downturn. Even more extraordinary is that these policies persist. Deutsche Bankstrategists point out that 25% of the world’s economy still has negative interest rates. And the balance sheets of the Fed, the European Central Bank, and the Bank of Japan—which more than quadrupled in size from their levels before the crisis, to a combined $14.5 trillion—will only begin to fall in aggregate later this year.

The Fed under Jerome Powell is increasingly focused on these policies’ role in inflating financial bubbles. He has noted that the past two recessions have followed financial excesses: the housing bubble that led to the financial crisis of 2008, and the tech-stock bubble that burst in 2000.

Concern about financial excesses is spreading among central bank officials. In a speech last week, Fed Gov. Lael Brainard expanded on that theme: “The past few times unemployment fell to levels as low as those projected over the next year, signs of overheating showed in financial-sector imbalances, rather than accelerating inflation.”

Brainard previously had been a dove, supporting the go-slow policy on rate hikes under former Fed Chair Janet Yellen, who, in a speech Friday, counseled letting the economy boom to make up for the previous bust.

“This is not the Yellen academic Fed,” Gluskin Sheff chief economist and strategist David Rosenberg writes. Its past mistake has been to focus strictly on its dual mandates of stable inflation and low unemployment, without regard to financial excesses. In that regard, the Fed sees equities as expensive and corporate bond spreads as tight, he adds.

While the markets lurch up and down on the latest tariff headlines, it’s all but certain that the U.S. central bank will be removing accommodation by hiking interest rates, while continuing to shrink its balance sheet. There’s a 97.5% probability of a quarter-point boost in the federal-funds target rate, from 1.75% to 2% currently, at the Fed’s next policy meeting concluding Sept. 26, according to Bloomberg. The chance of an additional quarter-point move on Dec. 19 has risen to 79.2%.

In other words, this Fed aims to avoid stoking the excesses that led to past crises. And to leave the excesses to bloviating bankers and presidents.