Beyond the anger about Donald Trump’s move on immigration, which is the focus of protests in the US and beyond, there is a lot of fascinating stuff going on in relation to American economic policy. American CEOs are rushing to “reshore” jobs and build new facilities in the US, and there is the prospect of serious cuts in corporation tax, encouraging US firms that find high corporate taxes a barrier to bringing wealth accumulated abroad back to America to invest.
Now, White House chief economic advisor Gary Cohn (ex-Goldman Sachs) has announced that an executive order will be issued by President Trump to begin a revision of Dodd-Frank. This is the beginning of the administration dismantling the post-crisis architecture constructed after Wall Street chicanery made the Western world go bang in 2008. Deregulation? What could possibly go wrong?
Quite a lot, but do not run away with the idea that the Dodd-Frank system works or that less regulation is worse regulation. Although the changes will need to be monitored carefully, this is about stripping back excessively complex rules that have the perverse effect of benefiting the “megabanks” and other big players who can afford to run vast compliance departments. It keeps out competition, with the consumer picking up the bill in more expensive financial products.
The introduction of excessive regulation also had unintended consequences, in markets such as the US corporate bond market (a source for companies needing to tap debt) where for a while it all but shut it down. This was not foreseen by regulators who had hoped just to calm things down, and the market came back to life last year.
So, deregulation and change is coming to Wall Street…
The Wall Street Journal reports:
“Mr. Cohn said the administration’s goal of deregulating financial markets ‘has nothing to do with Goldman Sachs.’
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‘It has nothing to do with J.P. Morgan,’ he said. ‘It has nothing to do with Citigroup. It has nothing to do with Bank of America. It has to do with being a player in a global market where we should, could and will have a dominant position as long as we don’t regulate ourselves out of that.’
Mr. Cohn said existing regulations put in place by Dodd-Frank are so sweeping that it is too hard for banks to lend, and consumers’ choice of financial products is too limited.”
These changes may turn out to be among the most significant reforms undertaken by Team Trump with serious geopolitical and economic consequences. Why do I say that and what are the possible impacts? Three quick thoughts:
1) Wall Street is about to become much more competitive, compared to other financial centres elsewhere outside the US. The aim is liberate markets, encourage innovation, increase competition, incentivise wealth creation and create an American boom. It can go bang, again, of course. That is usually how it ends, but in the interim it will add to the sense that whether you like Trump or not (I don’t) he is unleashing economic dynamism.
2) It will be presented by critics as a gift to the Masters of the Universe of Wall Street, the big banks and global investment firms such as BlackRock, offering scope for increased profits and greedy behaviour. In the short-term that may be the case, but that is not really the story here. Look instead for reduced regulation opening up the market to smaller players by lowering the barriers to entry, particularly in the shape of those new firms rooted in new technology. The big banks will try to buy up the hipster competition, but some will get through without selling out. It’ll be a circus with hundreds of billions of dollars flying around, but the White House is taking a punt on deregulation speeding a great wave of financial disruption (it is coming) and on trying to make the US the undisputed leader to boost US growth.
3) This development poses a major and immediate challenge to the City of London, the rival to New York. This is bigger than Brexit. For all the overdone worry about leaving the EU and the talk about jobs going to Frankfurt, Paris and Dublin, those places simply do not compare with the hub status and advantages that London enjoys. But like the US, the UK put in place an overly complex package of regulation after the crisis. Some of it is necessary, and some of it is an interfering mess that leaves some practitioners spending more time serving regulators than their customers. The root of the problem is that there is just way too much of it and it is too complex. Trying to keep track of every aspect of a financial scene that is thanks to tech becoming ever more difficult to track and shape is impossible. Go instead for good, simple, effective regulation that works with the grain of human nature.
Will London and the government follow the Trump approach and simplify and reduce regulation? In 1977 the US reforms of May Day (when the markets were overhauled and computerised) led the way. Nine years later the City followed with Big Bang under Margaret Thatcher in 1986. Now, Theresa May must decide, like Maggie, whether or not to match Wall Street.