Donald Trump campaigned as a champion of the “forgotten man,” promising to make America great again with a focus on lunch-pail populism and steel mills. He accused both Ted Cruz and Hillary Clinton of being “totally controlled” by Wall Street. And he cleverly leveraged Bernie Sanders’s primary campaign accusations that Clinton was too close to banks into weapons he himself could wield.
On the campaign trail, Trump alleged that “Hillary Clinton meets in secret with international banks to plot the destruction of US sovereignty,” and that the United States has merely “an illusion of democracy” but is “in fact controlled by a small handful of special global interests rigging the system.” In his campaign’s closing ad on the subject, Trump drove the point home by juxtaposing Clinton with pictures of various prominent Jewish financiers.
Then, having won the election, he set about installing an incredible array of financial industry insiders at high levels of policymaking. They’re setting a policy trajectory that’s a stunning reversal of both Trump’s campaign rhetoric and the broad track of American policymaking over the years.
After the crash of 2008, there was broad consensus that something had to be changed. The Obama administration, joined by a handful of Republicans, put together the Dodd-Frank act to overhaul financial regulation in the United States. Many critics on the left (and a few on the right) argued that the law didn’t go far enough and should have implemented hard caps on the size of financial institutions. Most Republicans rejected the law but embraced alternative theories of how regulation ought to be changed — in terms of stricter limits on bank borrowing, an end of government involvement in mortgage securitization, or some kind of effort to guarantee that there would be no government bailouts in the future.
They are all different theories aimed at a similar goal — to restrain banks from engaging in excessive risk-taking that endangered the economy.
Trump is, however, simply throwing all of that out the window in favor of the idea that what America needs is more rules written with input of the banks themselves and aimed at the goal of encouraging a return of risky lending. That’s likely to be great for bankers, bank shareholders, and maybe the odd wealthy real estate developer while doing nothing for Middle America or the middle class.
Trump’s Wall Street team
Trump’s set of policy advisers so far is drawn overwhelmingly from Wall Street. Even without formal new acts of Congress, an administration team that wants to do Wall Street’s bidding can easily get its way by simply encouraging regulatory agencies to turn a blind eye to enforcement.
Trump’s National Economic Council chief, Gary Cohn, comes to the White House directly from service as chief operating officer of Goldman Sachs. For leaving the investment bank to join the government, he received a massive $285 million bonus from Goldman. Trump’s Treasury secretary, Steve Mnuchin, is a hedge fund manager who used to work at Goldman Sachs. The populist wing of Trump’s administration is represented by senior counselor Steve Bannon, who used to work at Goldman Sachs, and the moderate wing of his administration is represented by Trump’s daughter Ivanka, who tapped Goldman Sachs’s Dina Powell to serve as her policy adviser.
Then, on Friday, outside of a meeting with a new council of CEOs that includes JPMorgan chief executive Jamie Dimon, Trump proclaimed that “there’s nobody better to tell me about Dodd-Frank” — the big financial regulation overhaul passed in the wake of the crisis — “than Jamie.”
He proceeded to issue a vaguely worded executive order instructing his Treasury secretary to conduct a 120-day review of Dodd-Frank’s provisions and come up with proposals for things to scrap. It adds up to an administration that’s overwhelmingly likely to do the complete opposite of draining the swamp. Barack Obama’s financial regulatory apparatus almost certainly won’t be entirely thrown out the window, and it’s unlikely to be replaced by a sweeping new ideological vision. Instead, it will simply be implemented and overseen by and for the interests of the kind of wealthy business executives whose opinions Trump personally values.
As Trump himself explained while unveiling the order, “we expect to be cutting a lot out of Dodd-Frank.” To explain why, he referenced his rich friends. “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.”
As Larry Summers, former Treasury secretary and National Economic Council chair, put it, this is more like grousing from “an East Hampton cocktail party than a serious policy discussion.” But of course, Trump has a lot more experience with society parties than with serious policy discussions.
Bank deregulation without principles
Throughout the Obama era, conservative opposition to the post-crisis regulatory landscape took two broad flavors.
The basic premise of both the Federal Reserve and the White House was that, faced with financial crisis, the government had no choice but to intervene to rescue the system. Given that reality, a responsible government has an obligation to try to regulate the system in order to avoid the need for bailouts.
One strand of opposition to Obama’s regulatory efforts, personified by House Financial Services Committee Chair Jeb Hensarling, basically rejects this premise. This strand’s view is that a drastically simplified regulatory framework — perhaps including a crude limit on bank borrowing and not much else — would be fine, and what the federal government really needs to do is tie itself more strongly to the mast of free markets and no bailouts.
The other strand of opposition, reflected in industry, is simply that the industry would prefer not to be regulated. Bankers feel that if American banks weren’t regulated so much, they could do business more aggressively, which would be good. Trump’s choice of the COO of one giant bank as his top economic policy adviser and citation of the CEO of another giant bank as a leading authority on smart regulatory policy is a good sign of where he stands on this. His anecdote explaining that some of his rich friends are being told regulation is the reason they can’t get loans is, in its way, even more telling. Statistically speaking, there is more bank lending today than ever before. But it’s certainly true that if regulators allowed banks to engage in riskier behavior, some new risky bets could get made.
The downside, of course, would be a much more fragile economy.
Trump is laying the groundwork for the next financial crisis
It’s noteworthy that Cohn, whom Trump is relying on for advice, was Goldman’s COO, a practical businessman whose job was to work to make the bank more profitable. Goldman Sachs also has a division dedicated to conducting big-picture analysis of the global economy. That research division is headed by Jan Hatzius, whose views of Trump’s economic policies are worth paying attention to.
Goldman’s analysis of the Trump economy is a balance between the idea that Trump will deliver a short-term boost to growth thanks to fiscal stimulus and the concern that Trump will hurt the economy with chaos and trade wars.
That Trump’s team of former Goldmanites will unleash prosperity by deregulating Goldman Sachs doesn’t strike Goldman’s economic analysts as plausible. In part, that’s simply because with the unemployment rate already low and the Federal Reserve already in the process of raising interest rates, there’s no room for this to work.
Indeed, Cohn himself, speaking to the Wall Street Journal last week about his deregulatory agenda, said the United States has “the best, most highly capitalized banks in the world, and we should use that to our competitive advantage.”
Weaker regulation, in other words, will let US-based banks gain more global market share relative to European or Japanese competitors. That’s great if you happen to be a bank shareholder or a bank executive, or have a yearly bonus pegged to bank share prices. But it has nothing to do with creating job opportunities for the long-term unemployed or increasing middle-class wages.
There’s no great mystery as to how regulatory policy shaped primarily by the business interests of major banks ends — big profits, big bonuses, and eventually a big crash and a big bailout. But the genius of bank regulation as a policy area is that no matter how badly you screw it up, the odds are that on any given day, there won’t be a financial crisis anyway.
A poorly supervised financial system can pile on egregious hidden risks for fun and profit and suffer no obvious bad consequences for years. If it happens to blow up in an election year, of course, you’re screwed. But while dramatic moves on immigration, health care, and budget policy are sure to provoke immediate blowback, on bank regulation, it’s entirely plausible that Trump will sow the seeds of destruction and nobody will notice until reelection is in the rearview mirror.