Will the incoming President live up to his anti-establishment rhetoric?
When Barack Obama stood upon the podium to give his 2009 inauguration speech in Washington DC, he addressed the nation with a message of hope and change. He made reference to the turbulent economic situation that he had newly inherited in the form of a major financial crisis, then made clear that the state of the economy, weakened as a consequence of ‘greed and irresponsibility on the part of some’, called for bold and swift action.
When the crisis struck just before the 2008 election, the soon-to-be President had pointed towards Wall Street’s greed and regulatory failures within the financial sector and government, as examples of the need for change in the financial system. He said in a speech that, ‘A lack of oversight in Washington, and on Wall Street is exactly what got us into this mess’.
Regulation was indeed a big part of the reason that the world economy found itself in such a sorry state in 2008. There simply wasn’t enough of it. Deregulation (or, the reduction of the government’s power to police a particular industry like finance), contributed to the crisis by softening restrictions on banks in many ways. In the years preceding the recession, many rules were changed, from encouraging lenders to give more loans to poorer borrowers who wanted to get a mortgage (despite a higher risk of them not being able to pay it back), to relaxing the rules on how much the Bank’s could borrow, thereby leveraging themselves to extremely risky levels, putting themselves and the economy at risk.
Obama’s actions to reform Wall Street and it’s major financial institutions received mixed reviews. His administration passed the ‘Dodd-Frank’ act in 2010, but critics have argued most of the laws within it were made to secure the system during a crisis, as opposed to preventing one occurring. Some believe that a crisis of a similar magnitude remains inevitable in the future and not enough has been done.
Interestingly, despite the ambitious message of change upon which he ran, some of those who made up Obama’s tight-knit selection of economic advisers in 2008, were the very same people who contributed to the deregulation of the financial sector in the years leading up to the crisis.
One adviser on Obama’s team, whom The Guardian referred to as his economic ‘guru’, was the former Treasury Secretary under Bill Clinton, Lawrence Summers. Summers actively pushed for the deregulation of the derivatives market, parts of which played a fundamental role in causing the financial crisis.
Despite the best efforts of regulators who tried to impose closer scrutiny on the derivatives market, Summers, assisted by Alan Greenspan (who was then chairman of the Federal Reserve), fought their corner against the Commodity Futures Trading Commission, and won. It’s a market that is now estimated to be worth 1.2 ‘quadrillion’ dollars. Derivatives made billions for investment banks in the form of profits from credit default swaps (CDS) during the US housing bubble, but when it burst, the US housing market collapsed and the crisis followed.
We are now 8 years on from when Barack Obama was officially elected, and we are weeks away from the beginning of the Trump administration. How will he treat the financial sector?
Trump ran as an anti-establishment figure and denounced his Democratic rival Hillary Clinton for her links to major financial institutions. She had received millions of dollars in speaking fees and campaign contributions from banks and other ‘special interests’, and Trump used this as a weapon against her. He highlighted her connections in combination with stressing the fact that he was a self-funded candidate, to strengthen his own image of being a one-man force against the ‘establishment’ which she represented. In Florida he said “Hillary Clinton meets in secret with international banks to plot the destruction of U.S. sovereignty in order to enrich these global financial powers, her special interest friends and donors.”
Trump directed his broad range of criticisms towards Wall Street in the campaign. He refused to let his Republican rival Ted Cruz off the hook over his links to the financial sector, accusing him of being controlled by Goldman Sachs. As the election race heated up he said at a rally in September “When you cast that ballot, just picture a Wall Street boardroom, filled with special interests who have been bleeding your country and your city”.
But words can often be different from action, and just as the outgoing President was criticized over his picks for top economic jobs in cabinet, the same is happening with Trump.
Two of the top draws for coveted economic roles are former Goldman Sachs partner Steve Mnuchin and Wilbur Ross, a billionaire businessman. The former will be his treasury secretary and the latter confirmed as his Commerce secretary.
In December, two has become three as Gary Cohn has confirmed he has accepted the position of Director of the National Economic Council, overseeing Washington’s policy on economics.
The fact that Trump has jabbed at Wall Street repeatedly, yet picked alumni’s of a Wall Street behemoth in the country’s most important economic posts (similarly to George W. Bush with his pick of ex-Goldman CEO Henry Paulson) has prompted confusion over his stance. How much does Trump intend to change the financial sector (if at all), despite his criticisms? He has proposed to tear up Dodd-Frank, a sentiment echoed by Steve Mnuchin who told CNBC that the new administration’s No.1 regulatory priority will be to “Strip back parts of Dodd-Frank that prevent banks from lending.” The Centre for Research on Globalisation predict an even stronger response than Mnuchin has suggested. They said “It is a virtual certainty that a Mnuchin Treasury will scrap the pretense of regulating Wall Street that was mounted by the Obama administration. The only institutional change accomplished by Dodd-Frank, and a minor one, the establishment of the Consumer Financial Protection Bureau, is likely to be reversed.”
Trump frequently mentioned his plans for his administration to “drain the swamp” (as he called it) in Washington, referring to a ‘broken’ system, where lobbyists and other special interests have undue influence on the political process. With this language, he was attempting to share the public’s frustrations. Evidence shows that many Americans are skeptical in their perceptions of how politics works. A poll from Gallup in 2011, which provides data driven news, showed 71% of respondents believed Lobbyists have ‘too much’ power, ranking over 10% higher than the federal government itself in terms of their influence. When it comes to lobbying, the financial industry certainly spends a great deal of money on activities designed to best protect their interests. You can see the poll here.
A report from ‘Wall Street Watch’ in 2009 alleged that: “Over the last decade, Wall Street showered Washington with over $1.7 billion in what are prettily described as ‘campaign contributions.’ This money went into the political coffers of everyone from the lowliest member of congress to the President of the United States. The Money industry spent another $3.4 billion on lobbyists whose job it was to press for deregulation – Wall Street’s license to steal from every American.”
If this is the ‘swamp’ that Donald Trump is referring to, then how much does he intend to purify the murky waters? American’s across all demographics (but especially the working class, particularly in the rust belt) voted for change, but if Trump’s cabinet choices are anything to go by, his words are starting to ring hollow already.
Trump did however reaffirm his commitment to making changes in government, introducing a new rule in the first 100 days of his administration: a crackdown on officials taking lobbying jobs when they leave office, but whether this tougher stance will extend to Wall Street’s influence in politics is a much debated issue.
Trump’s decisions are about as predictable as his latest Twitter outburst, but the market reaction since his election also defied predictions. His surprise victory initially sent shockwaves throughout global markets, but since then stocks soared higher, with the Dow Jones reaching record highs. Goldman Sachs, perhaps unsurprisingly was one of the biggest beneficiaries of the uptick in the markets, with its shares booming by 33% to their highest levels since before 2008. Many industry commentators thought the opposite would happen and that they would plummet.
Will Trump indeed be a boon for the markets over the long term or is the post-election stock market rally merely a blip on the radar? invstr Founder and CEO Kerim Derhalli said: “Bank stocks have been among the biggest gainers in the market following Trump’s election victory. That outperformance is underpinned by two factors – a belief that Trump will roll back part or all of the restrictions on bank risk taking and secondly the fact that Trump’s fiscal spending plans will cause interest rates to rise and increase banking net interest margins. Given the prominence of Wall Street executives in Trump’s new administration, I suspect the marketplace will not be disappointed on either count.”