The Dodd-Frank Dilemma

[Stavros]

One of the common themes that links the Trump Presidency with the UK's exit from the European Union, and which I also believe is central to the campaigns of Marine Le Pen in France, and Geert Wilders in the Netherlands, is the view that the strict regulations that were imposed on the financial sector following the crash of 2008 have become an obstacle to the growth of business and thus of jobs. This ties in with the wider concern that the EU is institutionally responsible for a lack of economic growth -with the Euro blamed as well as the 'Eurocrats'- and that we are reaching the end of that phase of globalization when trade takes place 'behind closed doors' unless you have been given entry into the club, be it NAFTA, the EU or the mooted and supposedly dead TTIP and TPP. We are told to embark on a new era of free market competition with bi-lateral trade deals the way to go.

Dodd-Frank is a clutch of laws that were introduced in 2010 to regulate a financial sector precisely to protect the savings of average customers by preventing banks from speculating on the markets with their deposits, or 'casino banking'. It was an attempt not so much to limit borrowing, but ensure that banks did not borrow more than their business was worth. The view is that not only has this not worked, because the threshold was too low and too many small banks cannot borrow and thus invest on and indeed, in their customers -often small businesses- but that the Dodd-Frank laws also created a huge financial bureaucracy that produced regulations that are thousands of pages long, though critics do not admit that most of the regulations do not apply to most businesses -the frustration lies in finding those five paragraphs that apply to you.

Even Barney Frank now admits some of the laws are onerous and you can read a fairly rational argument on the repeal of some of Dodd-Frank here-
http://www.cnbc.com/2016/11/21/repeal-dodd-frank-it-wont-be-easy-for-donald-trump-to-end-the-rule.html

And a more robust -ie, politically biased- argument against Dodd-Frank here-
http://www.forbes.com/sites/realspin/2017/01/28/the-next-repeal-and-replace-dodd-frank/#447549746978

It seems to me that the dilemma on both sides of the Atlantic is that the champions of free markets want to believe their Brave New World will create a new era of prosperity, but in realty can't know. Just as we do not know what the impact of the UK's exit from the EU will be on either the UK or the EU, we cannot know if the release of capital for investment in the US through the repeal of parts of Dodd-Frank will make America Great Again, in the form of a substantial increase in jobs and economic growth.

The contradictions are glaring: Trump the radical returning the commanding heights of the US economy to the same people who almost trashed it in 2008; the liberation of markets at the same time that the US may raise tariff barriers on imports and tax domestic firms investing overseas -I can see why in some of its details Dodd-Frank can be amended, I am just not convinced the UK economy is going to flourish when it is 'liberated' from our largest market, just as I cannot see growth in the US at the level Trump needs if the economy hides behind tariff walls.

In the long run it may not even be financial regulations that determine patters of investment and profit in the form of jobs, but other factors. I am not an expert in these issues so a debate from more informed posters would be welcome.

[filghy2]

I see very little chance of financial regulation being reformed in any sensible way. The Republican Congress has an ideological aversion to regulation and has bought into a fairy tale that the financial crisis was caused by government failure rather than market failure, even though analysis by the Federal Reserve and other experts has thoroughly debunked these claims.

Why economic growth has been week is widely debated, but other factors have probably been more important than financial deregulation - notably fiscal austerity and increased risk aversion (so that households and businesses are reluctant to spend and borrow). The chaos and uncertainty unleashed by Trump are likely to increase risk aversion further. Even if letting the financial sector rip might boost growth in the short term this would be counterproductive if it planted the seeds for the next financial crisis. It that was to happen on Trump's watch it would be poetic justice but also very scary.

[Stavros]

From what I have read the repeal will be partial, and focused mostly on trimming regulations and pleasing Wall St. A Trump supporter on the BBC a while ago, whose name I cannot recall, when asked what he wanted from the Trump Administration said he wanted it to repeal every Executive Order signed by Obama. The aim among some of Trump's staff and supporters is to wipe out as much of the legislation associated with Obama as they can, and one should not underestimate the callous resentment that underlines their visceral loathing of both Obama as a man, and the administration over which he presided. Whether or not revenge is a sound basis for policy remains to be seen.

[filghy2]

One of the regulations in the firing line is the fiduciary rule requiring financial advisers to act in the best interests of their clients. This important because the finance industry is riddled with conflicts of interest as marketers of investment products pay financial advisers commissions for shifting their clients into these investments. Most people lack the knowledge to assess whether their adviser is doing the right thing - which is why they engage an adviser in the first place.

So much for the rhetoric about standing up for ordinary people against the corrupt establishment.

[Stavros]

Donald Trump has used his right under the Congressional Review Act, to annul recent legislation passed in Congress, in this case the Cardin-Lugar Provision which is an amendment to the Dodd_Frank laws, and was passed by Congress in 2010 and implemented in 2016. The provision
...requires that oil, gas and mining companies listed on U.S. stock exchanges (whether or not U.S.-based) disclose their royalties and other payments to foreign governments.
http://thehill.com/blogs/congress-blog/foreign-policy/317082-put-the-american-people-first-keep-the-anti-corruption

Trump is arguing that this reversal will enable companies to invest without the obstructive rules imposed by Cardin-Lugar, and that as a consequence “The energy jobs are coming back. Lots of people going back to work now.” Trump has not explained how a US firm investing in say, Brazil is going to create jobs in the USA, but it might help with the contract if any agreements with payments attached are buried in obscure language in the Annual Report.

The measure has been criticised by those groups who supported Cardin-Lugar precisely because it supported the transparency initiatives demanded by both shareholders and citizens of states where extractive industry earns billions a year that 'the people' never see -one thinks of oil-rich Venezuela, Angola, Mexico and Nigeria where 'the people' are mired in poverty and Brazil where the state owned oil company Petrobras is at the core of corruption investigations involving politicians as well as as oil company executives.

And the claim that Cardin-Lugar added a cost burden to companies is rubbished in the first link below.

Maybe businessmen know best how to run a business, and maybe 'the people' should be at the heart of the decision making-but not ask awkward questions-, but when there is an opportunity to make $50m at the stroke of a pen, 'the people' are conspicuous by their absence, and not usually invited to join moneybags on his yacht for a spin around the cape.

http://www.pwypusa.org/wp-content/uploads/2017/02/CRA-Mythbusters-Cardin-Lugar-Provision-2017-1.pdf

[hippifried]

I call bullshit. Only Congress or SCOTUS can negate an Act of Congress. There's no law giving POTUS that power, & there won't be.

[Stavros]

I call bullshit. Only Congress or SCOTUS can negate an Act of Congress. There's no law giving POTUS that power, & there won't be.
The point is that it is not an Act of Congress that it is being repealed, but a provision within an Act, in this case the Cardin-Lugar provision, and also because in terms of its timing, the Provision was only recently implemented and thus falls within the time-frame in which such Provisions can be changed or annulled as the case may be. My guess is that for wider changes to Dodd-Frank Trump will seek Congressional approval, or the new law will be proposed in Congress, though so far I don't know what new legislation Trump has sent to Congress as he seems to be using Executive Orders for most of his decision-making.
https://en.wikipedia.org/wiki/Congressional_Review_Act

[sukumvit boy]

The House voted to repeal Dodd -Frank on June 8th , now what? Back to the free for all 'Wild West' in finance and on Wall Street.
http://www.latimes.com/business/la-fi-dodd-frank-repeal-20170608-story.html

[Stavros]

There's one that snuck in under the radar while the UK was convulsed by the election and DC with the Senate Committee hearings...but another example of the politics of revenge, to reverse everything that was passed by the Obama Admin, with Cuba on the agenda this coming week.

[broncofan]

The Republicans claim the new bill makes our banks more competitive while Democrats claim it makes our financial system more unstable. The latter claim is more likely to be true. Repeal of the Volcker Rule, a key part of Dodd Frank, which places a limit on banks trading on their own account, will unquestionably increase the risk of bank insolvency. Repeal of the Labor regulation which requires investment advisors to consider the interests of their clients when providing investment advice has no purpose at all except to allow investment advisors to profit from dishonesty. The new bill also loosens consumer protections, which will make people more susceptible to predatory lending and ultimately bankruptcy.

The Dodd Frank bill was written as a retrospective attempt to understand the causes of the 2008 crisis and reduce the risks of the same catastrophe. It is true that there is an inverse relationship between liquidity and stablility and that some balance between these two countervailing goals is necessary. But the Republican's bill does not come in the wake of financial sector stagnation. There is no indication that Dodd Frank has prevented people from getting loans and further the repeals are not directed at improving liquidity. They are more geared to removing accountability and allowing excessive risk taking by insured institutions, something known in insurance markets as moral hazard.

[broncofan]

As an add on to my last post, consider the best way to describe what's wrong with the bill is to consider the most direct route for enabling people who need loans to get loans. There are many more direct ways to allow single families and small businesses to borrow money, including through HUD subsidized mortgages, than to allow banks to make risky investments or to remove consumer protections. It is true that consumer protections may prevent some usurious loans from being made, but it is not a reasonable objective to increase borrowing activity by making the terms so unfavorable a person is likely to go bankrupt. The repeal of the Volcker rule is most directly an attempt to increase bank profitability, and will only have indirect, uncertain effects on lending activity. A more profitable bank will be more likely to lend with less stringent underwriting.

I am not certain what the new bill does with mortgage backed securities and their transfer or to the public exchanges for trading credit default swaps, which were among the most important regulations in Dodd Frank. By creating and selling mortgage backed securities, the underwriter does not carry the risk he created when he authorized the loan, and by allowing the sale of unregulated insurance products like credit default swaps to insure the mortgage back securities, regulators were not able to keep track of how systemic the risk was.

[Stavros]

Although I appreciate the technical arguments in your last two posts, Broncofan, and we can see that loose regulations on the flow of money benefits some people if not others, and usually those who have 'spare cash' to plug a hole when it appears, but is there not a cultural issue here. And that is the Canada Question. Why have so many banks failed in the last 100 years in the USA but no Canadian banks? You can count on the fingers of one hand the number of banking failures in Canada since 1800, I think it is three. You need a forest of hands to number US bank failures.
A conservative attitude to borrowing and lending is at the core of the stability of the Canadian system, and the willingness of the banking and financial sectors to be regulated by government. There are times when government is good for the people, even the most fanatical free market capitalist can agree on that, it is a pity that in the USA they deny that there are inherent perils in the system if it is not regulated properly. But until the attitude to regulation changes, the ebb and flow of regulation-regulation lite as one government follows another will continue, and in the long run banks will fail again. And make no mistake, part of this repeal is motivated by revenge, to undo what Obama did regardless of the damage it may cause.

[broncofan]

I'm certain you're right, both on the cultural question and the purpose behind the Republican bill. I think there is a common thread though between this bill and our exit from the Paris agreement. Others are willing to tie their hands and give up some potential for growth in return for safety, while we quickly become complacent and want to restore some American ideal, related to speculation, entrepreneurship, and whatever other way we idealize ourselves. Safety does not sell well to our public.

[Stavros]

And yet the President who presided over a booming economy with high taxes, minimal foreign adventures, and cautious government spending was Eisenhower, a Republican. Historically, the USA does well when taxes are high, the banking and financial sector is regulated, and the US military is not intervening in conflicts without end as it is today. But then maybe there is some truth in the view attributed to Bannon that the system must first be destroyed before it can be re-built using the template of 1776...you might want to find out of your local bank will finance a bunker stocked with canned food and barrels of water. You may need it in your lifetime.

[Stavros]

So, farewell then, Silicon Valley Bank....another day, another banking failure in the US. No banking failures in Canada. Hmmm, now why is that?

Congress Was Told Deregulating Banks Increased Crisis Risks. They Did It Anyway. (yahoo.com) (https://uk.news.yahoo.com/congress-told-deregulating-banks-increased-170251399.html)

Why Canada Didn't Have a Banking Crisis in 2008 | NBER (https://www.nber.org/digest/dec11/why-canada-didnt-have-banking-crisis-2008)

[filghy2]

Never fear: Republicans are onto the real cause of bank failure. You guessed it; wokeness!

https://www.vox.com/money/23638473/silicon-valley-bank-failure-fdic-republicans