The stringencies of financial regulation put into law following the global financial crisis, commonly known as the Dodd-Frank Act of 2010, are being explicitly targeted for repeal by the new administration.
While the administration’s recent friendliness toward Wall Street is a gross example of political bait-and-switch, there should be more concern about the ripple-effects of repealing the act. Fortunately, the roots of Dodd-Frank run deep and a complete overhaul of the regulatory framework presents an enormous, if not impossible, challenge for legislators.
Since the election outcome in early November, finance stocks have done substantially better than their non-financial counterparts. And with good reason: The industry is likely salivating over the targeted provisions for repeal, which would include removal of the ban on bank trading with its own capital (Volcker Rule), limiting Federal Reserve bank supervision and scrapping the requirement that banks formalize their own dismantling in the event of failure (living wills).
Such an about-face for politicians is not, in and of itself, a shocking turn of events. What is shocking, to me, are the nuts and bolts of the proposed dismantling. Enveloped conveniently within these regulatory rollbacks is the memorandum by the new administration to the Department of Labor to thwart the “fiduciary rule” set to take effect this April that targets the advisement incentive structure for retirement accounts.
The Social Security Administration and the Pew Research Center, among others, estimate that roughly 70 million people will retire from their professional lives over the next 20 years. The fiduciary rule requiring sound advice that is in the best interest of clients regarding retirement is a crucial rule. The Council of Economic Advisers estimates that $17 billion a year in funds would be channeled away from finance coffers and back to the consumers by requiring this fiduciary rule to become law. Most people should be in favor of a government that sets the guidelines, in this case a code of conduct, and then lets competition prevail. Yes, it is not black and white, but this is the pragmatic balance that should be desirable on a large scale.
Dodd-Frank is not perfect. It is no panacea for regulating an immensely complicated industry, and credit markets are the life-blood of capitalistic economies. However, the claims that Dodd-Frank have led to widespread reductions in bank lending are grossly overstated, if not patently false. In fact, the Federal Reserve reports that commercial loan volume hit an all-time record high in November 2016 at $2.1 trillion. In January 2010, this measure was $1.2 trillion. Just last year, JPMorgan, Wells Fargo and Bank of America core loans increased 10, 5.6 and 1.1 percent, respectively.
Clearly, the fiduciary rule is a large bone thrown to the donor class. The political two-step looks near completion as two former Goldman Sachs executives, Gary Cohn and Steven Mnuchin, both appointed to lofty positions in the new administration, have been tasked with the repeal of Dodd-Frank and the fiduciary rule.
Targeting vulnerable retirees, those typically on fixed incomes so dependent on sound advice and the proper management of their funds, is ethically suspect. Why would we want to incentivize the financial sector to behave in a way that is not in line with the best interests of its clients? Promoting a larger menu of options for clients is starkly different from packaging unhealthy food as otherwise, simply because the commission fees and returns may be higher from doing so.
Some have considered the new administration’s posturing toward Dodd-Frank more “pageantry than policy.” Indeed, the new legislation would require 60 votes in the Senate, and the legislative process is likely to take numerous months, if not more. New written rules would have to be presented to the public for open debate and then voted on internally. Let’s hope this is not the legislative beginning to making the next financial crisis great again. Memories are fallible things, but forgetting the fabric that sewed near-economic collapse is a huge mistake.
Dr. Nicholas Mangee is an assistant professor of Economics at Armstrong State University and can be reached at Nicholas.firstname.lastname@example.org.