Jamie Dimon: Elizabeth Warren Doesn’t The Understand Global Banking System

June 19, 2015 0 Comments

I’m glad someone decided to say something, besides Warren Buffett, who really didn’t say anything substantial. I was beginning to think this woman would go throughout her entire career without being challenged. Last Wednesday, JP Morgan Chase & Co CEO Jamie Dimon had some rather choice words to say about the Senator from Massaechutts.

Jamie Dimon: I don’t know if she fully understands the global banking system

To which, Warren responded this later this week on the Huffington Post Podcast:

Elizabeth Warren: The problem is not that I don’t understand the global banking system. The problem for these guys is that I fully understand the system and I understand how they make their money. And that’s what they don’t like about me.

And looking at the video on Bloomberg, it should be noted that Bankruptcy lawyers all that privy to the banking industry. Sure, bankruptcy lawyers may understand how to deal with banks regarding bank foreclosures and explaining how to address the banks when filing for Chapter 7. However, none of this is actually related to normal banking operations, facilitating the flow of capital, and greasing the wheels for available credit throughout the economy.

We’re not exactly saying that Warren is stupid (well, most of us aren’t). Also, reiterating what the anchor said, you don’t actually need to be a banker to understand the finer nuances of modern banking or have the knowledge of a sophisticated financial insider. However, it recent years, Warren has yet to show that she demonstrate that she possess any of that knowledge.

For example, I’ve already written about her pontificating about of provision that allowed the Government to ‘swap-out’ a provision of the Dodd-Frank Act, which would have prevented the Government from bailing out banks from their derivative trades (mostly moving these instruments out of bank accounts and into broker accounts). However, this law really does nothing to prevent future financial crisis, nor does it even make sense to have it in the books at all.

We also cannot forget about her silly comparisons of financing banking operations to financing higher education for students. It’s no secret that Elizabeth Warren wants to make college more affordable for students, by lowering the interest students pay on their student loans. The bill she has introduced (ultimately defeated) would have actually dropped the Stafford interest rate from 3.4% to 0.75%. Her reasoning behind this:

Elizabeth Warren: Every single day, this country invests in big banks by lending them money at near-zero rates. We should make the same kind of investment lending money to students, who are trying to get an education.

If Warren isn’t surprising the Wall Street insiders on her “financial knowledge,” she is demonstrating why she is such a good politician. There are many things wrong with her bill, on the political and banking front.

The Rate Changes Are Superficial, At Best:

Reading into parts of her bill, it seems that the rate change is only one portion of financial aid: the Stafford Subsidize Loan. Granted, this is a huge part of student financial aid, but this reduction is only good for one year. Not to mention, there is no mention of the other Stafford Un-Subsidize loan, which wouldn’t have a rate reduction under Warren’s own plan. It makes you question whether or not Warren is serious about reduction student debt burden, or this is just a cheap political ploy.

Confuses The Discount Window With Long-Term Loans (Slightly Wonkish)

This is where her financial illiteracy sets in. Warren would have everyone believe that 0.75% is the rate banks lend from a central bank (in this case, the Federal Reserve), which is true. However, she neglects to mention that this is the rate banks lend on a short-term basis, and only used for specific reasons, such as a stock market crash or liquidity crisis. Now, what sense does it make for Warren for Warren to compare a short-term lending facility to long-term loans such as 10-year Treasuries? Absolutely zero.

Typically, banks lend to one another to meet their short-term needs, whether it’s to balance their deposits, meet reserve requirements or provide credit to ensure liquidity and keep sufficient funds on hand. When banks cannot find another lender, they borrow from the Federal Reserve, who is considered the lender of last resort.

The interest rates they charge on these loans are referred to as the base rate. These loans usually carry an interest rate of 1% above the federal funds rate and give a one day term, or overnight. The simple fact of the matter is that banks lend from the Federal Reserve overnight. Many of the loans these students borrow from the government last much longer than overnight.

However, let us say that the government borrows from the public (which it often does), the yields on 4 week are about 0.01%. If the government wanted to borrow for the long term, it would pay yields anywhere from 2.19% to as high as 3%. Now these are rated for the most trustworthy lender in the country. It wouldn’t actually make sense for a bunch of financially unseasoned students to be paying a lower interest rate, especially when the student delinquency rate is surging.

As you can see, delinquencies on student loans have risen, while delinquencies on other types of loans have dropped dramatically. In a natural market, riskier borrowers pay higher interest rates while credit-worthy borrowers get deals on their rates. That’s just the name of the game. Therefore, it wouldn’t really make sense to student borrowers to have better terms than the government: an entity that has never defaulted on a loan.

To be fair, it could be argued — by Warren or whoever supporting her — that lowering interest rates on student loans would actually reduce the default rate among student borrowers. The overall issue shouldn’t be why are banks able to borrow short-term at 0.75% when students are borrowing 6.8% long-term. The problem lies on whether 6.8% for student loans is justified when interest rates on so many other financial assets (mortgages, government treasuries, etc.) are near historic lows.

So, why exactly does this 0.75% mantra persist to this day? Only because it has become a good populist political gimmick to rally support behind her misguided cause. She knows the average American is virtually clueless about banking operations. She knows that she can simply say, “The banks are charged so little to borrow, while you students are charged so much,” and the public will never consider to dive deeper into the facts.

She doesn’t have to explain the differences between the Stafford Loans, Discount Window at the Federal Reserve, and why they are set the way they are. She can say anything she wants about banking, state it as if it were a fact and the electorate will treat it as such.

And if Warren doesn’t seem to understand the difference between the Discount Window and Long-Term Rates on student loans, then who knows what else she doesn’t appear to know about banking? Probably not a whole lot, but we can probably add that to a long list of things Elizabeth Warren doesn’t understand.

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