On Friday, the press went into a mad tizz about Donald J. Trump’s executive order to start ‘rolling back’ the Dodd-Frank Act (the massive cornerstone of financial regulation to emerge from the 2008 Financial Crisis). In particular, everyone was loving:
“There’s nobody better to tell me about Dodd-Frank than Jamie [Dimon] … We expect to be cutting a lot out of Dodd-Frank. I have so many people, friends of mine, with nice businesses, they can’t borrow money, because the banks just won’t let them borrow because of the rules and regulations and Dodd-Frank.”
Putting that casual nepotism aside, here’s an extract of what Trump actually requested (and here’s the original executive order):
The ‘Financial Deregulation Roll-back’ Executive Order
Section 1. Policy. It shall be the policy of my Administration to regulate the United States financial system in a manner consistent with the following principles of regulation, which shall be known as the Core Principles:
(a) empower Americans to make independent financial decisions and informed choices in the marketplace, save for retirement, and build individual wealth;
(b) prevent taxpayer-funded bailouts;
(c) foster economic growth and vibrant financial markets through more rigorous regulatory impact analysis that addresses systemic risk and market failures, such as moral hazard and information asymmetry;
(d) enable American companies to be competitive with foreign firms in domestic and foreign markets;
(e) advance American interests in international financial regulatory negotiations and meetings;
(g) restore public accountability within Federal financial regulatory agencies and rationalize the Federal financial regulatory framework.
Sec. 2. Directive to the Secretary of the Treasury. The Secretary of the Treasury shall consult with the heads of the member agencies of the Financial Stability Oversight Council and shall report to the President within 120 days of the date of this order (and periodically thereafter) on the extent to which existing laws, treaties, regulations, guidance, reporting and recordkeeping requirements, and other Government policies promote the Core Principles and what actions have been taken, and are currently being taken, to promote and support the Core Principles. That report, and all subsequent reports, shall identify any laws, treaties, regulations, guidance, reporting and recordkeeping requirements, and other Government policies that inhibit Federal regulation of the United States financial system in a manner consistent with the Core Principles.
Some problems with that Executive Order
Well, the obvious issue is that most of the ‘Core Principles’ are self-contradictory. For example, there are many things that:
- Foster economic growth; while
- Increasing the likelihood of a taxpayer-funded bailout.
In particular, ‘lending money’ does that – and unfortunately, ‘lending money’ is the primary business of banks.
So like most of Trump’s instructions, the whole thing turns out to be entirely vague, and leaves much room for interpretation, misinterpretation, and accusations of ‘fake news’.
Jamie Trump wrong though?
The trouble is that the world is in a bit of a strange place where financial regulation is concerned. Here are two main developments that have come about since 2008:
- There has been much greater financial regulation, including more Basel rules and the Dodd-Frank Act. All of that has limited the amount of ‘risk-taking’ that the banking sector can take. But lending money is, by its nature, ‘risk-taking’! So this has essentially translated into the banks doing less things with depositor money.
- Meanwhile, all the big Central Banks have engaged in Quantitative Easing, in the hope that the availability of cheap money would encourage more lending. And more lending tends to be stimulative.
Yes, that does seem to be a contradiction. It’s because it is.
The Central Banks have been trying to implement monetary stimulus – while the politicians have stepped in and enforced monetary austerity.
The net result:
In layman terms: $2.8 trillion all of Quantitive Easing money (at its high point) ended up back in accounts with the Federal Reserve. Doing nothing. Much as the Fed would have liked the banking sector to take on a little more risk with all that cheap money – the banking sector just handed it right back.
Oh, the irony.
And here’s the political divide:
- The Conservative Right are extremely distressed by all of the Quantitative Easing. But they’re even more distressed by the amount of financial regulation;
- The Liberal Left are all for stimulus in any form (including Quantitative Easing). But they’re also in favour of more financial regulation.
Both sides are asking for contradictory things. But for the time being, conservative politicians have the benefit of the effects of quantitative easing (all that spare cash sitting in the Federal Reserve accounts) without having to actually support quantitative easing. And they can unlock it by rolling back some of the financial regulations that are limiting the banks from dishing out credit.
Seems like a real sweet low-hanging fruit of a deal to me.
And whether I were Donald or Dimon, I’d be real tempted to inject all those excess reserves into the economy. Of course, that might be the point at which all the concerned libertarian pundits start seeing their long-predicted rise in inflation – but that’s next Administration’s problem.
In the meantime, the upsides could be yuge.