Jay Powell, the Next ’08, and the Great Taper Tantrum

Jerome Powell Testifies On Federal Reserve's Response To Coronavirus Pandemic
(Photo by Graeme Jennings-Pool/Getty Images)
William D. Cohan
July 11, 2021

Since I began writing my column for Puck, I’ve been inundated with feedback about Wall Street’s biggest characters and concerns. I’ll be engaging with some of those questions here—in addition to a few observations of my own.

Nobody seems to agree on when the Fed should begin “tapering” its historic asset purchases or how much inflation risk really exists in the economy. Given all that, do you think Biden will renominate Jay Powell as Fed Chair, or potentially pick his own man … or woman?

Joe Biden obviously is not consulting me about whether to reappoint Jay Powell, whose term as Fed Chair is up next February. At the moment, I would say his re-appointment is a slam dunk, but there is many a slip between cup and lip. If the economy keeps on its current powerful trajectory and the financial markets somehow keep their shit together—and honestly I don’t know how that keeps happening; they almost defy the laws of nature at this point—then he is a shoe-in. But markets can go haywire at any moment, and often do in the fall, so Powell’s reign could come to an end as a result of an unforeseen downturn, which are rarely foreseen. If I were him and I still wanted to keep the job, I’d start my lobbying for reappointment soon. Lock that baby up. And then pray there is foam on the runway when the jet comes crashing back to earth.

I enjoyed your interview with JPMorgan Chase C.E.O. Jamie Dimon, in which he suggests that the next fews years will be akin to the Roaring Twenties: “when it ends and how bad it is, I don’t know.” Do other top bankers share his portentous outlook?

Any clear-thinking finance type, anyone with an M.B.A., any economist, anyone who manages money for a living—with the exception of Cathie Wood, the financial evangelist—knows the end is near for the markets. It’s been 13 years since the last financial crisis and both the bond and the stock markets are at all-time highs. It’s like when you are a AAA-rated company, there is only one direction that credit rating can go, and that is down. (And it usually does.) The Fed’s long-in-the-tooth Quantitative Easing program, now in its twelfth year or so, has exploded the Fed’s balance sheet past $8 trillion, on its way to $9 trillion, according to the New York Fed. The market manipulation that keeps interest rates so low for so long is simply not sustainable and bankers across Wall Street and beyond know that. What no one knows is what happens when the morphine drip is removed from the markets’ arms. Sure feels good now, but I hear the D.T.s are pretty rough. So, yeah, businesses are reopening, consumers are ready to roar, and the economy will hum for a while still. But we are overdue for a massive financial correction. If I were the aforementioned Jerome Powell, I would begin getting the foam ready. I would signal to the markets that the Fed is easing up on Q.E., for real. And let the markets have a good cry. We’ll all feel better and then things can get back to normal, whatever that is these days.

Most of the financial innovation I hear about these days seems to focus on Bitcoin, blockchain, tokens, “DeFi.” Back in reality, what’s the most important challenge being tackled by a bank or a private equity firm?

Well, banks and private-equity firms have different challenges, and none of them, in my opinion, stem from fintech, or any of the financial innovations you mention. For private equity firms, the problem is what to do with all their “dry powder,” no pun intended—how they can invest that money wisely, without getting caught up in overpaying for or overleveraging the companies they want to buy. But between a trillion or so dollars of “dry powder” and another $150 billion or so in SPACs, the competition is fierce and so purchase price multiples are rising.

It takes discipline not to overpay and be tempted by the easy money. The smartest private equity managers will be careful right now, and go for the long-term greedy approach. If private equity firms were smart, they would be sellers now of companies in their portfolios. Liquidate! Return capital to investors! Wait for prices to come back to earth. Private equity firms also have to worry about whether the Biden administration will finally roll back some of their beloved tax breaks, either on carried interest or the tax-deductibility of interest. But the industry is a pretty powerful lobbyist. It’ll figure out a way to tamp down that threat. It always does.

As for the big Wall Street banks, Credit Suisse aside, things are pretty damn good right now. They are well capitalized. The Fed is letting them return capital to their shareholders, through dividends. Business is booming and will likely continue. There are looming threats on the consumer and payments side of the business from Big Tech, as Dimon told me, but I don’t really see it, not in the near term. Since 2008, the surviving Wall Street banks have become a powerful oligopoly. There are huge moats around these businesses, and fintech and Big Tech ain’t penetrating them anytime soon.

After the financial crisis, I appeared regularly on Bloomberg TV, talking about how I believed there would be a new Golden Age on Wall Street (for the surviving banks, anyway), and everyone thought I was crazy. But I was right. Things have never been better for Wall Street banks. As Dimon told me, JPMorgan Chase is a beautiful machine that pumps out $40 billion of profit a year. The real threat? The coming financial crisis.

Have a question you’d like answered in the next edition? Email us at fritz@puck.news.