The Congress and Senate are looking to pass legislation which would relax rules put into place after the 2008 financial crisis. This legislation will come at the expense of the 2010 Dodd-Frank act, President Obama’s signature policy imprint on the post-crisis regulatory regime.
[U]nlike the $1.5 trillion tax overhaul, which passed along party lines, the effort to loosen the post-crisis rules is somewhat bipartisan. A group of Senate Democrats has joined Republicans to support legislation that would mark the first major revision of the 2010 Dodd-Frank Act, a signature accomplishment of President Barack Obama that has been deemed “a disaster” by President Trump.
For those old enough to appreciate the events of 2008, it might come a surprise that any politicians - least of all Democrats - would be willing to risk setting up a similar crisis in the future.
In 2008, nearly all global banks failed. These failures could have resulted in a depression greater than the 'Great Depression' of the 1930s.
It is worth remembering these events to maintain perspective on the forthcoming actions by Congress and how those actions might usher in a return to the kind of risky behavior that landed the world in crisis just a decade ago.
It was the year the neo-liberal economic orthodoxy that ran the world for 30 years suffered a heart attack of epic proportions. Not since 1929 has the financial community witnessed 12 months like it. Lehman Brothers went bankrupt. Merrill Lynch, AIG, Freddie Mac, Fannie Mae, HBOS, Royal Bank of Scotland, Bradford & Bingley, Fortis, Hypo and Alliance & Leicester all came within a whisker of doing so and had to be rescued.
Western leaders, who for years boasted about the self-evident benefits of light-touch regulation, had to sink trillions of dollars to prevent the world bank system collapsing.
Collapse was averted, with markets rising out of the ashes to the heights bragged about by President Donald Trump today. But what are the implications of undoing the protections put in place post-crisis and championing once again a 'lighter-touch' approach to regulation?
Fewer than 10 of the biggest U.S. banks would be subject to the strict federal oversight in place today.
Under current law, banks with assets of $50 billion or more are considered “systemically important financial institutions” and therefore governed by stricter rules. The bill would raise that threshold to institutions with assets of $250 billion or more.
Banks with assets of $50 billion to $100 billion would be immediately freed from those requirements. Financial institutions with $100 billion to $250 billion in assets, such as BB&T and American Express, would no longer be subject to tougher rules after 18 months, although the Federal Reserve would retain the authority to periodically conduct stress tests on those firms.
The Volcker Rule would lose some of its teeth.
Under the bill, firms with less than $10 billion in assets would be exempt from the so-called Volcker Rule, which prohibits banks from making risky bets with federally-guaranteed deposits. Mortgage rules for small lenders would also be eased.
A bill that already passed in the House would strip even more power from Dodd-Frank:
That bill would, among other things, remove the prohibition against using federally insured funds for risky lending and gut the Consumer Financial Protection Bureau. Under the Senate bill, it would remain intact.
There remains a potential fight between the chambers over what to include in legislation that would land on the president's desk, but the points of agreement are concerning enough as is.
By October of 2008, leaders across the globe were scrambling to steady the financial system and grant hope to their people that all would be well. It might do current U.S. leadership well to recall those days and summon the same fortitude necessary to avoid wandering down that road again.
Frantic markets were reassured, at least at first, of the politicians' determination not to allow the crash of 2008 to bring the global financial system grinding to a halt. But after a week staring into the abyss, weary politicians knew they still faced a long, tough battle to prevent the world lurching into a new Great Depression.