Until last Friday, little of the Trump administration’s policy rollout thus far had much to do with issues of economic recovery and stability, financial regulation, bank lending or even jobs. Then came two Executive Orders (EOs) that put those issues front and center.
We will have a look at the Order targeting the Fiduciary Rule and its implications later but will drill down on the second EO here. We will ask specifically — since the Order is consistent with all previous campaign, confirmation, and tweeted Trump and cabinet financial policy statements to date — whether it is good policy and good politics.
The Orders and the Rationale
Friday at noon, the Trump administration issued two Executive Orders addressing its priorities in financial regulatory policy. The first Order made clear that the administration’s first order of business is the Fiduciary Rule, the provision in the Dodd-Frank Act (DFA) requiring brokers to provide retirement advice reflecting the customer’s interest (rather than what will yield the best commission).
But the second Order was much less specific about the rest of DFA. In fact, it is only a paragraph long and reads in relevant part as follows:
The Secretary of the Treasury 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 record-keeping requirements, and other Government policies promote the [administration’s] Principles and what actions have been taken, and are currently being taken, to promote and support the[m].
Trump complains that his friends in the business world “can’t get any money because the banks just won’t let them borrow it because of the rules and regulations in Dodd-Frank.” The NYT editorial board wrote yesterday, “[t]hat’s ridiculous. Corporate America has been enjoying robust profits, and the stock market is near its all-time high. Certainly, none of the companies represented in [Friday’s White House] meeting are having a hard time getting credit.”
Trump seemed determined to ignore the nation and world’s overall stability in many contexts and the ongoing work needed to improve economic and financial stability specifically, increases in full-time jobs and in wages as well as the reduced bank failures, an end to bank bailouts, and material progress on combatting TBTF.
What Should be Done?
At Friday’s White House meeting at the State Dining Room with business leaders and Wall Street executives, Trump said “There’s nobody better to tell me about Dodd-Frank than Jamie, so you’re going to tell me about it.” He means Jamie Dimon, CEO of JP Morgan, the largest financial firm in the U.S. with over $2 trillion in assets.
What does Dimon have to say on Wall Street’s behalf about DFA? “We’re not asking for a wholesale throwing out of Dodd-Frank.” At Davos, Dimon said that he would prefer a focus on the existing DFA rule making process and not on new legislation.
Trump’s DFA Policy Plans
Trump and his administration have set high expectations for their financial policy. The policy bears directly on the capital markets, which serve every sector of the economy and are a source of job creation as well as capital formation. It lies at the heart of the administration’s core objectives.
It is no surprise then that Trump and key allies in Congress seek to “dismantle” DFA, as Trump and his cabinet designates have put it. House Financial Services chair Jeb Hensarling called the Order “the beginning of the end of Dodd-Frank.” Recent Senate Banking chair Richard Shelby said, “I’d like to repeal the whole thing, period.”
At Friday’s White House/Wall street meeting, Trump explained the impetus behind his policy:
“We expect to be cutting a lot out of Dodd-Frank because frankly, I have so many people, friends of mine that had nice businesses, they can’t borrow money. They just can’t get any money because the banks just won’t let them borrow it because of the rules and regulations in Dodd-Frank.”
Truth in Lending Arguments
The leading rationale for the repeal of DFA is precisely this: that it has constrained bank lending and thus retarded the recovery. Not only is this claim contradicted by facts — it is classic policy in search of a problem.
Over the past three years, total loans and leases by U.S. banks have been growing at 6.9 percent a year, per the Federal Reserve, an almost complete recovery from the period at the start of the recession, when lending crawled to a halt. This followed the years 2000-07 when the lending rate was growing too rapidly to be sustained, at 7.9 percent.
Today’s figures do not suggest dire circumstances for borrowers and lenders, who are roughly equally responsible for consumer credit market conditions. Those arguing that DFA has crippled credit availability and subsequent lending will need to rebut these facts (or come up with alternatives).
Another canard floated by DFA opponents: that the law applies a one-size fits all approach to financial regulation which punishes small banks. In fact, there are bank size cut offs and carve outs all over Dodd-Frank. When the bank size cut-offs create the remarkably broad exemptions from DFA enjoyed by community banks and credit unions, the big banks argue with the size cuts off in DFA as “arbitrary.”
Wall Street acts like its regulatory burdens are everyone’s. But the most onerous regulations facing financial firms arise from international capital controls. But those brought by DFA don’t apply to to small banks, e.g., requirements like having to produce living wills or submit to annual stress tests. Only 114 banks over $10 billion and 40 banks over $50 billion are subject to these tests — 154 banks out of the 6,000-plus banks in the U.S.
The Political Peril
The animal spirits shoving capital markets around the world and into record territory are boosting financial firms most of all. Shares of Morgan Stanley jumped five percent on Friday with the possibility emerging from the EOs that the Fiduciary Rule may be ignored to death or defunded by the Trump administration.
Dimon & Co. may be doing the president a favor not just by talking down the need for investors or Washington to do anything rash. He may trying to spare the GOP the embarrassment of repeat of the ACA/repeal and replace fiasco — and trying to spare Wall Street the politically radioactive image of appearing at the front of the line for Trump’s first favors and giveaways.
Those such as House Financial Services chair Jeb Hensarling seeking to abolish DFA on the grounds that it is dangerous reducing aggregate lending face a heavy burden of proof and run an arguably reckless political risk on behalf of a patent mistake about what Wall Street wants.
The Trump administration has already absorbed the political lesson of the Repeal and Replace approach to then landmark law of the Obama era. The keystone cop act of its ACA reform made little practical sense even where the law has 40-50 percent popular support. In the case of Dodd-Frank, with support closer to 60-70 percent nationally, with as little policy rationale as Trump and proponents of repeal have mustered, and you have a recipe for a mistake, if not a disaster. Repeal/Replacing DFA