After much speculation, President Trump has announced his pick to lead the Federal Reserve System: Jerome “Jay” Powell. How should we think about this appointment in the context of the overall Trump administration thinking on financial regulation?
Trump slammed Wall Street throughout his campaign, asserting big banks had “gotten away with murder.” The Republican National Convention platform even mentioned a new Glass-Steagall (the Great Depression-era restriction on banks’ activities). Still, many questioned whether the Trump administration, including Powell, was committed to implementing policies tough on global megabanks.
The answer is no.
There are actually two Trump administrations. One, which attempts to deal with issues that require legislation, like health care, is having trouble making progress. But the second, which can change the rules of regulation, is moving full-steam ahead. We can already see the ground being cleared for a major round of financial deregulation.
There are three important signs of intent when it comes to finance. First, the top people on economic policy in the White House and at Treasury have all worked on Wall Street—and mostly at one big bank, Goldman Sachs. Gary Cohn, the former Goldman Sachs president, is chairman of Trump’s National Economic Council, and he has brought in a team that apparently is running the show in terms of policy. Cohn has made his intentions clear: He wants to roll back regulation.
Treasury Secretary Steven Mnuchin, another Goldman alum, shows no signs of wanting to stand in Cohn’s way. Dina Powell, influential as deputy national security adviser, also used to work at Goldman and is close to Cohn.
Second, the key regulators and supervisors have all been replaced or are going to be replaced—including at the Federal Reserve Board of Governors, the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency, the Commodity Futures Trading Corporation, and the Securities and Exchange Commission. We should not rush to judgment, but every indication is that the Trump nominees—mostly lawyers with a long list of financial sector clients—will favor a radical rollback of financial regulation.
Third, the Treasury Department recently produced a report that suggests deregulation is on its way. The report is extensive and not everything in it is a bad idea. But the heart of the report paves the way for the reduction of effective capital requirements (in English: allowing banks to borrow more, relative to the value of shareholder equity, which makes them more prone to fail), the repeal of the Volcker Rule (which limits risky trading by banks), and the weakening of consumer protection.
To be fair, it remains to be seen how much the Trump team can get away with. This is not the run-up to the financial crisis of 2007–08—when all official Washington was beguiled by the mumbo-jumbo of Wall Street titans.
There is far more healthy cynicism these days, among both Republicans and Democrats, particularly in the Senate. But Republicans on the House Financial Services Committee have now worked long and hard to advance an agenda of radical deregulation and tend to brush aside any reasonable objections to what has become an extreme ideology-driven agenda. It looks like Trump and his appointees could be following their lead.
Trump’s top priority now appears to be passing his tax bill, unveiled today. Assuming GOP leaders work with the president on this push, it will also make it easier for Trump and House Republicans to align on financial deregulation.
Full-scale deregulation might also be harder for Trump to do because this is not the early 2000s. The six big banks that dominate the US financial system can no longer get everything they want on the day they want it. Measures like the 2010 Dodd-Frank legislation did make the financial system safer, to some extent.
In addition, central bank and other financial officials have changed their thinking, becoming more concerned about systemic risk and the ways in which large banks can ruin otherwise healthy economies—including in the United States and Europe.
But none of this is set in stone. The regulations that banks regard as onerous are unlikely to be removed in a single fell swoop. Instead, we will probably see them peeled back, one by one, in relatively quiet fashion. Most likely this will not be repealed through legislation but rather unraveled through a team of (de)regulators, working in loose coordination with each other.
In the 1990s and early 2000s, Wall Street thinking essentially captured Washington policymakers. Top people became convinced that what was good for the people who ran big banks—less regulation—was good for the country.
Despite everything that has happened since the 2008 financial collapse, as the dust settles around the Trump administration, we see exactly the same thing emerging again: Wall Street executives calling the shots, and arguing that what they want will actually increase growth and benefit the most people.
Whether anyone actually believes that today is hard to say. Trump’s Washington is not about ideas or about convincing people—it is about power and being able to get away with things.
The big banks are back in charge of financial regulation and much more. The future is looking bleak for you and me. For the people running Goldman Sachs, however, it has rarely looked better.
Follow Simon Johnson on Twitter at @baselinescene.