May 15, 2012
Citing a silver lining in JPMorgan Chase’s $2 billion trading loss,Treasury Secretary Timothy Geithner said on Tuesday that the banking debacle will greatly strengthen the Obama administration’s hand in fending off efforts by Wall Street to dilute the Dodd-Frank financial overhaul legislation enacted in the wake of the worst financial crisis of modern times.
Since the law was signed by President Obama in July 2010, Wall Street executives including Jamie Dimon, CEO of JPMorgan Chase, have criticized it as excessive government regulation, including capital, liquidity and transparency requirements and the so-called Volcker rule that strongly limits the amount of capital that banks may invest in private equity and hedge funds.
Now, with Dimon reeling from the uproar over JPMorgan Chase’s reckless and costly hedging which even Dimon acknowledged was “egregious” and “stupid,” Geithner and the administration apparently feel they are back in the catbird seat in demanding tough rules to limit risk by mega banks.
“We are very confident that we will be able to make sure those come out as tough and effective as they need to be and I think this episode helps to make that case,” Geithner said during a conference on fiscal and budgetary issues sponsored by the Peter G. Peterson Foundation.*
Geithner said he hasn’t spoken with Dimon, known to some as “the King of Wall Street,” since news of the huge loss rocked the financial world last week. Federal regulators have launched an investigation into the financial debacle, which so far has led to the resignation of Ina Drew, the chief investment officer. Lawmakers including Sen. Carl Levin, D-Mich., and Rep. Barney Frank, D-Mass., a chief author of the financial overhaul legislation, said that the banking industry would lose the battle to defang the new law because of the JPMorgan Chase debacle.
“This failure in management is a very powerful case for reform, for financial reform,” he said, “the reforms we still have ahead and the reforms that have already been put in place. The test of reform is not whether you can prevent banks from making mistakes. That’s going to happen. It’s inevitable. The test of reforms should be: Do those mistakes put at risk the broader economy. . . And the best way to prevent that from happening [is] to make sure you force banks to hold more capital, which we’ve done, to fund themselves more conservatively to bring down leverage, and to make sure the rest of the financial system has better cushions against these kinds of mistakes.”
The Peterson Foundation’s third annual fiscal summit in Washington comes amid growing concerns about a potential year-end explosion of tax increases and federal spending cuts that many experts warn could jar the economy and set back the recovery unless modulated by Congress. At the close of 2012 and the dawning of 2013, many major fiscal events are set to occur simultaneously. It’s what Federal Reserve Board Chairman Ben Bernanke has called “a fiscal cliff” of spending and tax changes of a high magnitude. These include expiration of the Bush era tax cuts, the payroll tax cut and other important tax provisions. They also include the activation of the first installment of the $1.2 trillion across-the-board cuts or “sequester” of domestic and defense spending.
And, once again, Congress may have to raise the debt ceiling – a politically explosive task that nearly led to the first ever default in U.S. debt last summer when President Obama and congressional Republican leaders couldn’t agree on a budget and debt agreement until the last minute.
House Speaker John Boehner, R-Ohio, who is under growing pressure from his conservative members to take another hard line with the Democrats, plans to address the issue of the national debt at the conference later today. According to advance remarks provided to The Washington Post, Boehner will insist that any increase in the debt limit be accompanied by spending “cuts and reforms greater than the debt limit increase.” This is the same demand Boehner and House Majority Leader Eric Cantor, R-Va., made a year ago in the run-up to the nearly cataclysmic debt ceiling and budget talks.
“This is the only avenue I see right now to force the elected leadership of this country to solve our structural fiscal imbalance,” Boehner says. “If that means we have to do a series of stop-gap measures, so be it.”
But how this will all play out is anybody’s guess. If Congress and the White House decide to extend the Bush tax cuts along with scores of other tax breaks, that would increase the debt in 2022 by about $7.5 trillion above what it would be if the tax cuts were allowed to expire, according to the Committee for a Responsible Federal Government. This means the debt would rise from 70 percent of GDP today to 88 percent by 2022.
Conversely, if those major tax cuts expire – a highly unlikely event – the Congressional Budget Office projected that the annual deficit would shrink from $1.1 trillion to $196 billion – an 82 percent reduction over the next six years. The resulting increase in tax revenues combined with spending cuts would nearly halve the deficit in 2013, lowering it to $585 billion.
Geithner said that the confluence of events would help to force the administration and Democratic and Republican leaders in Congress to negotiate a balanced plan for addressing the country’s short-term economic challenges and the looming long-term debt crisis.
Total federal debt today is $15.7 trillion, including $10.9 trillion held by the public. The U.S. currently spends about $200 billion a year on interest on the public debt. In ten years, interest is projected to reach nearly $1 trillion a year, according to the foundation, which is dedicated to increasing public awareness about long-term fiscal challenges. (*Peterson also finances The Fiscal Times, an independent and non-partisan digital news operation.)
Geithner stressed that all sides would have to make compromises on spending, entitlement and tax issues. And that despite Republican opposition to raising taxes to address the deficit, “You can’t do this without a modest increase in tax revenues.”