Trump’s Destruction of Post-Crisis Regulation Begins to Take Shape

Today’s post reacts to the recent report put forward by the U.S. Department of the Treasury entitled ‘A Financial System That Creates Economic Opportunities: Banks and Credit Unions’, which represents the aim of the Trump Administration to ‘do a big number on Dodd-Frank’. The headline effect of the report, namely the proposed circumvention of the Consumer Financial Protection Bureau (CFPB) on the basis that ‘the CFPB’s approach to enforcement and rulemaking has hindered consumer choice and access to credit, limited innovation, and imposed undue compliance burdens’, will no doubt be the key issue with regards to the fallout of this contentious report. For this post, we will assess the report and the underlying sentiment, and then position this understanding within a wider picture of the ‘amnesia’ that is taking hold despite a number of globalised warnings regarding the ability of the system to withstand any more shocks so close to the last Crisis.

The Treasury report is the first of a number of reports that are due in the coming years. The reports are important because we can see, in black and white rather than on Twitter, just how President Trump envisages the financial system and how it should operate. With that in mind, the opening gambit of the report is telling. The approach of the Treasury, now controlled by Steven Mnuchin who we have covered previously here in Financial Regulation Matters, is attached to what they are calling the ‘Core Principles’ which, derived from an Executive Order, range from ‘Empower[ing] Americans to make independent financial decisions and informed choices in the marketplace’, to making ‘regulation efficient, effective, and appropriately tailored’. In this specific report, the focus is on Banks and Credit Unions, with the underlying sentiments focused on ‘breaking the cycle of low economic growth’ and ‘better fulfilling the credit needs of consumers and businesses’, predominantly. With regards to ‘economic growth’, the report is forthright in its focus on the decontextualised understanding that ‘the U.S. economy has experienced the slowest economic recovery of the post-war period’ – the report is clearly downplaying what the Economy is actually recovering from, as there is nothing to compare it to in the ‘post-war’ period. On this basis, the report singles out the Dodd-Frank Act and its ensuing regulations, stating that ‘the sweeping scope of and excess costs imposed by Dodd-Frank’… have resulted in a slow rate of bank asset and loan growth’, and that the regulations ‘created a new set of obstacles to the recovery’. This recovery, according to the report, can only be realised by a prosperous banking sector and ‘an extension of credit to consumers’, which brings us to the second component of the report. With regards to credit, the report states that ‘the largest stalled asset class is residential mortgage lending’, which is supposedly due to the ‘lack of tailoring and imprecise calibration in both capital and liquidity standards’. In relation to this, there was an extensive focus on the issue of costs emanating from compliance, with it being advanced that ‘increased oversight and regulation has led to an increase in compliance costs’. Residential mortgages, a market which was dogged by systemic fraud, is an important aspect for the report, with the overriding sentiment being that there needs to be a ‘careful study of regulations and the extent to which they may be holding back the supply of mortgage credit’ which is obviously music to the ears of the financial sector – the Financial Services Roundtable gleefully declared that ‘today’s report is an important step towards modernising America’s financial regulatory system’. Yet, whilst the financial lobbyists prepare for their celebrations, there are a number of extremely important, and extremely worrying developments that emanate from the report.

The first is an issue that is currently on the lips of regulators in the U.K.: capital requirements. Yesterday, and pre-empting tomorrow’s post in Financial Regulation Matters somewhat, the Bank of England increased the capital requirements of Banks in the U.K. because of fears regarding excess lending – more specifically, fears remain over the easy access to credit for those who are not in a position to repay given potential shocks to the marketplace, something which we have discussed in Financial Regulation Matters with regards to the ever-growing auto-loan bubble. Yet, the Treasury’s report states that only ‘internationally active’ banks should be subject to capital requirements (a move aimed to unleash the speculative capacity of national institutions), and that for those ‘internationally active’ banks there should be a more rigorous test, like taking into account the ‘banking organisation’s historical experience’, as opposed to any more qualitative or quantitative measures. In opposition to the fears in the U.K. and around the world, like in China for example, the Treasury is adamant that Americans need access to more credit, not less, and the only way to do so is to fundamentally incapacitate the CFPB who, according to the report, hinders consumer access to credit. In order to achieve this end, the report suggests that the Director of the CFPB should removable at the will of the President, or alternatively be restructured as an independent multi-member commission (which could then be gutted from the inside out), funding the CFPB through an annual process (killing the Bureau by denying it oxygen i.e. funding), and incredibly ‘curbing abuses in investigation’, whatever that may be. This aspect, as suggested in the media, is unlikely to go down well with Elizabeth Warren, the Senator for Massachusetts, a leading voice in the creation of the CFPB, and a vocal critic of President Trump. The report details a number of proposals, but these headline-grabbing suggestions offer more than enough for us to understanding the sentiment of the rhetoric.

The Trump Administration is, in no uncertain terms, readying itself for a major assault on the safety of American consumers, and global citizens moreover. The blatant rejection of global fears regarding the consumer-credit bubble that is growing, when considered in relation to the fact that the last crisis was only 10 years ago, is not only irresponsible, it is dangerous. The blinded rhetoric that looks at ‘growth’ independently of the reasons for the lack of it, are nothing short of a confirmation that history will judge this phase of American politics with damnation. The Executive Director of ‘Americans for Financial Reform’ responded to the report by stating that ‘the financial crisis had devastating costs for families and communities’ and that ‘we need more effective regulation and enforcement, not rollbacks driven by Wall Street and predatory lenders’, which is not only accurate, but perhaps even an understatement. What is clear, however, is that when Donald Trump repeatedly stated ‘America First’ during his campaign trail, he was misunderstood; he was referring to the American elite, not the American people – this report is the first of many that articulate that reality.