Presidents like to talk about rolling back the regulatory state, but they never do it. For all his flaws, could Trump be the one?
FROM POLITICO | FEBRUARY 5, 2017
Of the many polarizations of the United States today, the battle over regulation is particularly fierce and many years in the making. Over the past decades, since at least the presidency of Ronald Reagan, the right and the Republican Party have come to view regulation as the premier sign of government overreach, stifling freedoms and hobbling economic growth. The left and the Democrats for the most part see regulation as the vital bulwark protecting the mass of Americans from corporate and government abuse.
So it should hardly be a surprise that the White House’s recent moves to revisit the regulatory state have evoked high levels of emotion. However predictable, let’s try not to lump these moves into the same toxic stew that has enveloped so much of Trumplandia. There is a real, genuine and constructive debate that could be had over regulation—what is enough, what is too much and what is smart. In today’s hyper, near-hysterical political climate, that may well be asking too much, but that makes the call for it all the more vital.
On Friday, the president signed an executive order that was widely described as beginning the rollback of financial regulations enshrined after the 2008-09 financial crisis in the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. The order itself, however, was much vaguer than that, titled simply, “Presidential Executive Order on Core Principles for Regulating the United States Financial System.” The text was equally anodyne, a few short paragraphs laying out six utterly unobjectionable principles (“prevent taxpayer-funded bailouts” and “foster economic growth and vibrant financial markets through more rigorous regulatory impact analysis…”) and directing relevant government agencies to review all current regulation.
It wasn’t the bland text of the order that provoked a strong reaction on the left—it was Trump’s comments and the optics of the former president of Goldman Sachs, Gary Cohn, grinning over his shoulder as he signed it. Earlier in the day, Trump told a meeting of financial CEOs, “We expect to be cutting a lot out of Dodd-Frank … Because frankly, I have so many people, friends of mine, that had nice businesses, they just can’t borrow money ... because the banks just won’t let them borrow because of the rules and regulations in Dodd-Frank.” Cohn added later, “We’ve been told we need deregulation to grow jobs in this country. We are not anti-regulation. We want smart regulation that allows our financial services to be the envy of the world.” Hard to argue with that sentiment, and yet…
The response was swift and hyperbolic. Sen. Bernie Sanders laced into Trump as “a fraud” who duped voters into thinking he would be for the common man. Sen. Elizabeth Warren, who helped shape the Consumer Financial Protection Bureau, one of the key innovations of the act, piled on and accused Trump of cynically and hypocritically lambasting Wall Street when running for president and siding with Wall Street now that he is president. She acidly remarked that Wall Street titans must have been popping champagne corks afterward, and she might actually be right about that.
The conviction that Dodd-Frank has choked off lending is widespread in financial circles, but it is not entirely consistent with the facts. Lending certainly did drop precipitously after 2009, which would be expected given the near implosion of the financial system and the near insolvency of the nation’s largest banks holding trillions of dollars of derivatives whose value was in question. With the economy contracting and then only slowly recovering, demand for loans was muted at best, regardless of regulations and capital requirements. Drawing a causal line to financial regulations is difficult, and even with Dodd-Frank in place, lending is now back to where it was in 2007, according to the Federal Deposit Insurance Corp.
On the flip side, the new thicket of agencies and regulations have undoubtedly raised the cost of compliance for financial institutions, and led to a risk-adverse culture that is almost a mirror to the anything-goes culture that prevailed to such destructive effects before the crisis. Many large banks now have half a dozen federal regulatory agencies that oversee them, with overlapping responsibilities, each auditing and issuing complicated and at times contradictory rules, each in its own way well-intentioned and addressing real issues and excesses but whose net effect makes it impossible for smaller banks to ever bear the costs of compliance. Hence small and community banks continue to disappear, burdened by costs they can’t quite bear and capital needs that are ill-suited to their scale, until they are swallowed by larger banks that homogenize credit standards to the detriment of local knowledge and individual decision making that would potentially benefit entrepreneurship, business creation and community revitalization. The upshot is that Dodd-Frank has done what many large, complicated regulatory frameworks do: inadvertently privilege and strengthen the large institutions that are purportedly the object of the regulations in the first place.
(Full disclosure: I have worked for, run and consulted with asset management and financial service companies over the past 15 years, but little that I’ve done has been directly covered by Dodd-Frank, nor have I perceived much negative impact from the bills in my corner of the financial world, which is as distinct from banks as nursing is from biotech in the health care industry.)
One of the most acute critics of the modern regulatory state, Philip Howard, has relentlessly advocated for regulation to be driven solely by the common good, which would mean a good deal of deconstructing the current regulatory state. He, like others, has drawn attention to not just the inevitable bureaucratic creep, but also the way each special interest group demands its own tweaks to regulation, which then adds to the general sclerosis and impedes economic activity.
The idea that we could have better, more efficient and less costly regulation should strike nobody as radical or objectionable. When Bill Clinton was elected in 1992, one of Vice President Al Gore’s first initiatives was to reduce government bureaucracy and regulation to make government smarter and more effective. Barack Obama embraced the same mantra as he entered office. So did George W. Bush. The public debate on regulation tends to unfold in partisan terms, with supposedly pro-regulation Democrats pitted against deregulatory Republicans. But each new president over the past 25 years has understood that there is a nonpartisan space to debate good regulation vs. bad, effective vs. ineffective, costly and cumbersome vs. nimble and cheap. Clinton and Gore tried—and essentially failed—to reinvent government; Bush intended to focus on canceling regulations, but his administration ended up mired in foreign policy; and Obama hired noted legal scholar Cass Sunstein to review all regulation in 2009 with only marginal effect on the labyrinthine regulatory state.
In spite of these efforts, that regulatory state has grown in scope each year after relentless year, under Republicans and Democrats alike. New rules continue to proliferate, as do costs—2015 was a banner year, with 81,000 pages of new rules published in the Federal Register.
Now comes Trump promising to review and eliminate, which is immediately treated as handing the keys of the financial industry to the Wall Street titans who profited from the chaos and escaped accountability. It may be, of course, that the rules are rewritten purely to benefit the large banks, but it is also true that the White House cannot unilaterally rewrite those rules and that the Republicans who now control Congress have no mandate to roll back needed consumer protections. Holding the White House and Congress accountable for maintaining a regulatory framework that protects the public good is essential. But you can defend necessary, prudent regulation and also support rationalizing the current morass of competing, onerous and contradictory rules.
These debates also assume a high level of distrust and suspicion that can only harm the body politic. Regulatory frameworks often work best when industry works with regulators to achieve common goods and systemic stability; a constant state of antagonism impedes that, as do inflexible rules and doctrinaire regulators. The British financial regulatory system established after 2009, for instance, tries to create a more cooperative framework for financial institutions to work with regulators to achieve widely accepted social goods such as innovation, stability and the free-flow of credit. Punishment and fines are always part of the mix, but not to the exclusion of working jointly to common ends.
It is almost impossible to imagine a civil, measured approach to these questions of regulation and the financial industry in today’s political climate in the United States. The complete absence of trust and respect between the current administration and many of its constituents is not a recipe for lasting reform. That is one of many shames. America needs to modernize and rationalize many of its most important regulations, in the financial world, in health care, and elsewhere.
A system of prudent regulation facilitates our ability to meet common needs, but that is not the system we have. Previous administrations have tried to address the problem and failed. A new and controversial White House is now taking a crack at fixing it. Regulatory reform would be a great boon to our future, if only we could find our way to it.