President Trump has an unusual solution to help America's tepid economy: Let the financial industry cheat again.
On Friday, the Trump administration rolled out new executive actions, this time calling for a review of the Dodd-Frank financial reform law signed by President Obama. The Labor Department will also have to consider whether a new fiduciary rule Obama put in motion, to be enacted this April, should be rethought or scrapped.
Like the rest of Trump's executive fiats, these orders can't unilaterally rewrite the law. Only the legislature can do that. But there's some executive branch discretion in how Dodd-Frank's rules get written and enforced. For instance, Trump could re-staff agencies with different (read: loyal) leaders, place institutional pressure on the agencies to tread lightly, and so on.
But after the financial industry nearly destroyed the economy in 2008, who on Earth would view deregulating the financial industry as a good idea?
The answer is obvious: the financial industry, of course. The more they're deregulated, the more they profit — the rest of us be damned.
Now, financial elites and their backers in government can't come right out and say that. So their outward rationale goes something like this: "Today, banks do not lend money to companies. Banks are forced to hoard capital and they can't take any risks," as Gary Cohn, Trump's newly minted director of the National Economic Council, told Fox News on Friday. "Instead of lending capital to their clients and allowing their clients to grow their businesses and hire people and create jobs, [banks are] taking that capital and hoarding it to meet the regulatory requirements." Trump, too, has said Dodd-Frank harms small businesses and the country's "entrepreneurial spirit" by reducing access to credit.
But Cohn and Trump are dead wrong about how bank lending works.
How much capital banks are "hoarding" actually has little to do with how much they can lend. The capital banks have on hand is always far less than all the money a bank's customers could pull out of it at a given moment — the deposits, the loans, etc. That's why bank runs used to be such a problem: If everyone demanded their money at once, the bank couldn't meet the demand and collapsed. This is inherent to how private for-profit banking works. (We ultimately solved the problem by creating the Federal Reserve system, which backstops the private banks with the federal government's unique ability to create money.) But it's quite profitable for banks to lend more and more compared to the capital they've got on hand, which is why Dodd-Frank reined them in.
What drives lending isn't how much capital banks are "hoarding" — it's whether a given bank thinks a given loan would be profitable. Will the customer be able to service the loan and pay an interest rate that's worthwhile for the bank's bottom line? If so, the loan is approved. If not, it's rejected.
If banks aren't lending, it's not because they don't have enough cash. It's because they can't find customers who meet their criteria. And the reason they can't find those customers is because the economy is still in the doldrums.
Now, maybe what Cohn means is that if banks hoard less capital it's easier for them to make a profit. And that is true. If capital requirements force banks to keep more money as a cushion against disaster, that's more money they can't spit out to shareholders. But Trump's solution encourages lending by making the system riskier at every level: Banks are more vulnerable to collapse, and all the customers they're lending to are more likely to default.
Or consider the Consumer Financial Protection Bureau (CFPB), which Dodd-Frank created, and which has been cracking down on payday lenders, pawn shops, and other outfits that prey on poorer Americans. Precisely because these people are poor, they don't make a good customer base for traditional banking. So predatory financial services are often the only ones that can make a profit while serving these people, and they do it through sky-high fees. The GOP says the CFPB is hurting poor Americans, and that the way to help these folks is to weaken the agency and make it easier for payday lenders and such to exploit them.
Now consider the fiduciary rule the Obama administration was working on.
When it comes to professional financial advice, people in the industry deal with their customers according to two different standards. One is the "fiduciary standard," where the adviser is duty bound to recommend a retirement portfolio that puts a customer's interest first in every way. The other is the "suitability standard," where the adviser recommends a portfolio that's good enough for the customer, but that also comes with riskier investments and higher fees so the adviser can make bigger profits.
The sizable majority of financial advisers operate by the suitability standard. The Obama administration's rule would force them to operate by the fiduciary standard. Congressional Republicans and President Trump are insisting this will make financial advice harder to come by, because advisers will see less incentive in advising people.
Far too many millions of Americans already face a retirement crisis. It's really difficult to save enough money to build a decent portfolio, and the 401(k) system is coming apart at the seams. The GOP's answer? Make it even easier for financial advisers to bleed retirees with high fees and shove them into riskier investments.
I trust you see the theme that's emerging here.
Republicans don't like "big government" solutions. No Keynesian stimulus to help the economy, and less welfare aid and direct job creation to help the poor. Nor do they want to make Social Security more generous to help retirees.
They want the private financial industry to solve all these problems instead. But the industry can't do that because it's part of the private economy. It's in a funk too! The only solution left is to give the financial industry more leeway to offer even riskier loans and exploit customers even more — inevitably leading to another economic disaster.