Many City bosses disapprove of Trump’s presidency, but would be happy to see Dodd-Frank reformed
President Donald Trump has finally appointed a Treasury Secretary, with former Goldman Sachs banker Steven Mnuchin confirmed by the Senate last night.
Mnuchin joins former Goldman Sachs number two Gary Cohn who has been filling the vacuum since becoming Trump’s head of the National Economic Council, and is believed to have already exerted broad influence across the White House.
Both men have their eyes on a specific target: Dodd-Frank. The post-crisis mass of red tape was signed into law nearly seven years ago; for its supporters, this was a bold endeavour by Barack Obama and US regulators to protect the economy from another crash.
For its detractors, however, the 22,000-page document is riddled with misguided interventions prompting a range of unintended consequences, potentially laying the path to even greater economic problems in the future.
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Trump himself has slammed Dodd-Frank in typically Trumpian terms, pledging to "do a big number" on the regulations. "I have so many people, friends of mine, with nice businesses, they can't borrow money, because the banks just won’t let them borrow because of the rules and regulations and Dodd-Frank," he said.
Given Trump's brash approach to policy so far, his attack on Dodd-Frank understandably sent shivers through the spines of European regulators, politicians and commentators. Eurozone central bank boss Mario Draghi described any relaxation of post-crisis rules as "the last thing we need".
However, the sentiment coming from Cohn and Mnuchin has been predictably more measured than the President's. "We are not anti-regulation," Cohn said. "We want smart regulation that allows our financial services to be the envy of the world."
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Too much of our response to the financial crisis has been based on the fallacy that it was singularly caused by a lack of regulation. Capital buffers protect banks from a downturn, yes, but ultimately we should be tackling the roots of the crash – the gross moral hazard and flawed government interventions that inflated problems in the markets for so many years.
Protecting big banks with armies of supervising regulators and risk-averse compliance staff risks imbedding "too big to fail" and eroding competition even further. Smarter, more streamlined regulation should allow for a freer market where participants make their own choices, and bear their own losses.
Many City bosses are alarmed by Trump's protectionism, his divisive travel ban, and even his casual approach to fiscal deficits. But mention Dodd-Frank reform and they quickly change their tune. It is perfectly possible to disapprove of the President's wider approach to government, without also believing that Dodd-Frank is a sacred cow.