Is Trump setting us on a course for disaster?
A mere decade after the worst economic crisis since the Great Depression, the Trump administration is unwinding the post-crisis regulations in the banking sector whose absence helped trigger that collapse.
It’s too soon to say that we are back on a path toward the widespread cupidity in U.S. financial markets that put more than 9 million Americans out of work in 2008-2011, and cost more than 400,000 Canadians their jobs.
The U.S. crisis soon migrated to Europe. Today’s widespread European xenophobia can be directly traced to the scapegoating of immigrants by victims of that protracted recession, caused in fact by the collapse of a record U.S. housing bubble inflated by malfeasant mortgage lenders in Kansas and Bakersfield, Calif.
It’s not too soon to worry, though, that the Trump administration and its allied Republican-controlled Congress are intent on once again making the global financial system vulnerable to an economic shutdown and worldwide credit freeze, possibly worse than the last one.
During the 2008 Wall Street meltdown, insolvent major U.S. financial firms were forcibly merged into stronger ones. The result is today’s fewer but bigger U.S. financial institutions, each with an unprecedented ability to bring the global system to its knees. The Trump administration might not be intent on reverting to an anything-goes, 2000s financial system that was akin to a zoo with the bars down. But that is the direction in which the U.S. system is now headed, after an Obama era in which the pendulum had swung toward stricter supervision of banks.
Rather than gutting regulatory agencies designed to prevent another 2008 catastrophe, Trump is gradually but relentlessly weakening them. That is the insidious means by which the savings and loan crisis of the 1980s was made possible. No one noticed how parlous the savings and loan industry was becoming until it suddenly collapsed. And few alarms have been sounded about U.S. President Donald Trump’s current hollowing out of financial-system safeguards.
Trump’s Treasury Department is obliging America’s biggest banks that are seeking to avoid the tag “too big to fail.”
That label subjects such banks to strict government supervision.
Trump’s Office of the Comptroller of the Currency is looking the other way rather than enforcing laws against big-bank malfeasance. Trump’s Securities and Exchange Commission (SEC) is now focused on suspicious activity only at the biggest financial institutions – which is how comparatively small fry like fraudster Bernie Madoff were able to slip through the cracks.
Trump has appointed as interim head of the Consumer Financial Protection Bureau (CFPB), which safeguards Americans from piratic financial providers, a man who is a staunch opponent of the CFPB’s existence. And Trump’s Commodities Futures Trading Commission (CFTC), a watchdog on the derivatives securi- ties that Warren Buffett described as “weapons of mass wealth destruction,” has cut the number of fines and penalties it imposes.
The U.S. Congress, meanwhile, is working on a bipartisan bill that reduces government scrutiny of America’s thousands of regional and “community” banks. Those smaller banks helped inflate the record-sized U.S. housing bubble. Today, they are just as profitable as their big “money centre” banking peers and would not seem to need regulatory relief.
Credit is abundant in the U.S., for the small businesses and farmers served by those smaller banks, contrary to the Congressional bill’s proponents.
Congress is trying to solve a problem that doesn’t exist, while creating a new one by re-introducing lax regulation. But hometown banks wield enormous clout over local members of Congress, and that’s the real motive here.
Trump, of course, is an erstwhile casino-resort operator who more than once has been spared insolvency by a friendly banker. And so, Trump has claimed in a recent tweet that America’s financial industry is “devastated and unable to properly serve the public.” What utter nonsense. U.S. banks are flourishing. In their most recent fiscal year, U.S. commercial banks racked up a record profit of $157 billion (U.S.) They are also serving the public with a near-record number of loans.
And the share prices of banks have been powering upward, a rival to the U.S. tech sector in richly priced stock.
Jamie Dimon is arguably America’s most powerful banker as CEO of JPMorgan Chase & Co., the biggest U.S. bank. Dimon insists that Trump is merely tweaking, not scrapping, financial regulations, to make them less cumbersome.
In his latest earnings call, Dimon said, “This is (only) about recalibrating some of the very detailed rules … so that markets are more liquid and mortgages are more available.”
Yet mortgages are plenty available now, in the absence of the regulatory laxity sought by banks.
As for very detailed rules, as they say, God is in the details. It was, for instance, one of Dimon’s unnoticed “very detailed rules” that gave Wall Street free rein in the go-go 2000s to start peddling novel, computer-devised derivatives that promised a fat, goof-proof profit. The Street then created derivatives of the derivatives. And global banks started flipping $250-million bundles of those dubious securities among themselves for a quick profit.
Too late, it was discovered that most of those securities were actually worth between five and 20 cents on the dollar. Massive write-offs on that “toxic waste” were required, often exceeding the capital reserves of even the biggest financial institutions.
That included a 158-year-old Lehman Bros. Holdings Inc., whose Sept. 15, 2008 bankruptcy filing triggered a lending freeze among other global banks with which Lehman had outstanding obligations — daily inter-lending being a common practice in the industry. Only an 11th-hour, $400-billion (U.S.) American government bailout of all major U.S. banks prevented the global system from collapsing.
Fact is, the U.S. financial system has gone haywire every decade or so for the past half century. Earlier episodes include over-lending in developing-world markets in the 1970s, the savings and loan crisis and over-lending in the U.S. oilpatch in the 1980s and going overboard on commercial real estate lending in the 1990s.
Trump seems intent that disaster experts be busy again in the not-distant future.