Jamie Dimon blames DC dysfunction for slow economy

Jamie Dimon said he blames Washington's dysfunctional partisan climate for holding back the U.S. economy.

Before the Council on Foreign Relations on Wednesday, Oct. 10, the JPMorgan Chase & Co. chairman and CEO said the U.S. economy would be "booming" if the White House and Congress been willing to work out deals addressing the looming "fiscal cliff" and the longer-term problem of the federal budget deficit.

Dimon also called on policy makers to "collaborate" with business to address aspects of the Dodd-Frank Act financial reform rather than letting litigation by some industry groups opposed to the law play out in the courts.

The most pressing problem, he said, is the fiscal cliff that early next year will automatically trigger deep government spending cuts and tax hikes as a result of an agreement reached last summer to raise the debt ceiling.

"That's the big deal," Dimon said of the fiscal cliff in an interview with CFR president Richard Haass.

Dimon noted that JPMorgan spent $50 million to $100 million preparing for likely consequences of the 2011 debt ceiling crisis because of the "complexity of what would happen in financial markets" if the U.S. defaulted on its debt.

Although the fiscal cliff doesn't pose the same level of threat, Dimon said some policy makers are too cavalier about the effects of allowing the tax hikes and spending cuts to kick in.

The consequences of nearing or going over the cliff are impossible to predict, he said. "Right after the election people [in business] will say, 'This is bad and let's not make decisions at the margin. Don't hire; don't go; don't buy. Let's just wait and see.' Well, that is a recession. People fall back a little bit, so let's not do that to ourselves."

Longer term the failure to address the budget deficit is the biggest problem facing the economy because the bond markets will eventually reject U.S. debt, Dimon said.

"It's assured," he said. "The question is when and how."

He predicted that the markets will start punishing U.S. irresponsibility within two to five years.

"The United States can't borrow indefinitely. We are going to have fiscal discipline whether it's imposed upon us or we do it ourselves the right way."

He lamented the Obama administration's and many lawmakers' failure to embrace the recommendations of the Simpson-Bowles Commission to cut $4 trillion from the deficit over the next decade. "Had that been done, this economy would have been booming," Dimon said.

Enacting the recommendations would have shown the markets that the U.S. has the will to address its economic problems and would have created a more efficient tax system and created certainty about "a bunch of policy things."

If Washington can get its act together, the U.S. has an economic foundation primed for growth. "The President, whoever he is next year, should recognize one thing for certain: He goes into office with a royal straight flush."

America's advantages include a military that remains the world's best and will for years; capital markets that are wide, deep and the most transparent; an excellent business culture; world leading innovation; "good rule of law;" a "Protestant work ethic;" cheap shale oil; and corporations in great shape.

"If you were going to invest in one place on the planet, it would be here," he said.

The lingering 2% growth rate, half of the U.S. historical average, can be blamed on "a huge wet blanket out there" caused by uncertainty around taxes, the fiscal cliff, overregulation and last year's debt ceiling fiasco.

Remove the wet blanket "and this thing is going to take off," Dimon said.

He called on Washington to dispense with the warfare mentality that infects both political parties.

"We should have collaboration. But it became war and litigation over Dodd-Frank and healthcare."

Rather than waiting to see how business groups' litigation against the Dodd-Frank plays out, he said the White House and Congress should negotiate fixes to the most glaring mistakes, which he considers to be the Volcker Rule's ban on propriety trading by banks and the resolution regime for winding down failed financial conglomerates.

Rather than allowing the Treasury to wind down failed institutions, possibly with taxpayer money, he said the banks should be forced into bankruptcy under a newly created Chapter 14.

"We have to get rid of 'too big to fail'," he said. Taxpayers "should never pay if JPMorgan fails."

Rather than Dodd-Frank's "vague" orderly liquidation process, Washington should create a "minimally damaging bankruptcy for big dumb banks," he said.

The Volcker Rule, which he complained was added to Dodd-Frank as an afterthought just before passage, should be scrapped entirely because there's no way to implement it without protecting banks' right to remain market makers.

Dimon also showed he is still smarting from the shellacking he received from Washington this spring following a $5 billion loss caused by trading losses in the institution's London office.

Dimon noted that no taxpayer money was needed to keep JPMorgan sound following the loss. He said shareholders took the hit and will deal with management as they see fit but his dressing down by lawmakers during congressional hearings was unnecessary. "Washington is the only place where a mistake is not allowed," he said.