| Trump’s
Financial Plans Promise Another Great Recession
By Barney Frank
December 07, 2016 "Information
Clearing House"
- "Boston
Globe"
-Apparently,
one aspect of American greatness that Donald Trump seeks
to recreate is the Great Recession of 2008. He calls for
a complete repeal of all the rules that were adopted to
govern the financial industry in response to that
crisis, restoring to it the freedom to create unlimited
debt throughout the economy, with no requirement that
serious attention be given to the ability of the
indebted to meet their obligations.
By the ’90s, the business of lending had been
transformed by securitization. Lenders sold the right to
repayment of loans, eliminating their incentive to worry
about the borrowers’ solvency. The financial
institutions that bought the loans then packaged them
into securities and sold pieces of these throughout the
economy. Other large institutions then sold insurance
against the failure of these securities to pay. The use
of derivative forms greatly magnified the amounts of
money at stake.
When imprudently granted mortgage loans began to
default, so did securities, leading to investor losses,
and demands that the insurers make good on their
pledges. Faced with a shutdown of the economy caused by
the spreading inability of the indebted to repay, and
the consequent refusal of anyone to advance funds to
anyone else, the Bush administration bailed out
multinational insurance company AIG, asked Congress for
general bailout authority, and intensified the work that
it had begun along with Congress to create rules to
prevent a recurrence.
Modified by the Obama administration and Congress, these
rules evolved into the Dodd-Frank Wall Street Reform and
Consumer Protection Act, which was designed to prohibit
abusive practices, and diminish the negative impact from
the misjudgments that are inevitable in a system in
which risk-taking is necessary.
Here are some of the most significant changes that will
result if Trump succeeds in wiping the law off the
books, with real-world reminders of the “great”
financial system he would restore.
■ The abolition of the law’s restrictions on granting
mortgages to borrowers who are highly unlikely to repay
means we will see successors to Countrywide, the
mortgage-granting machine that gave us countrywide
defaults.
■ The removal of the regulations governing trading in
derivatives means Goldman Sachs, J.P. Morgan Chase, and
others can return to the unrestricted dissemination
throughout the economy of securities composed of bad
mortgages, even when, in Goldman’s case, the packager
knew enough about the weakness of what it was selling to
bet its own money that it would fail to pay off.
■ An end to the rule that participants in derivative
trades either do so through exchanges or otherwise
demonstrate that they have the funds to meet their
obligations to their trading partners brings back the
situation that prevailed when three of the five leading
investment companies — Bear Stearns, Merrill Lynch, and
Lehman Brothers — were unable either to pay their own
debts or collect what they were owed by others, and AIG
told Federal officials it was 170 billion dollars short
of meeting its obligations to pay off what it owed those
who had bought their credit default swaps (insurance
against the failure of mortgage-backed securities).
■ This leads to the next result of a return to the good
old days: It will put Federal officials back to having
to choose between letting a company go bankrupt — Lehman
— with its disruptive effect, or bailing it out — AIG.
We repealed the provision that allowed the Fed to
advance 170 billion dollars to pay AIG’s debts while
letting it stay in business. It replacement — which
Trump would repeal, reinstating the unrestricted bailout
authority — empowers officials to pay only as much off
the debt of the bankrupt entity as is needed to maintain
economic stability, but only after putting it out of
business, and with a requirement that no money paid out
from taxpayers be recouped by assessment on the
surviving large financial companies.
■ Trump’s plan to wipe out the provision that purchasers
of loans who then package them for resale to bear
responsibility for the first 5 percent of the losses
that occur means the investing public will once again be
wholly dependent on the rating agencies — whose blend of
incompetence and dishonesty was chronicled in The Big
Short.” (My one objection to the way in which the law
has been administrated is the failure to apply this
provision to home mortgages, but the power to do so
remains in the law if experience calls for it.)
■ The disappearance of the Consumer Financial Protection
Bureau will return to the status quo in which consumers
harmed by the abusive behavior of a massive financial
institutions could only turn to the federal agencies
whose primary mission was to worry about the health of
these entities. Had there not been a consumer bureau,
Wells Fargo might still be creating false credit card
accounts.
I do favor some adjustments to lessen the scrutiny given
to small and medium-size banks, although not in the area
of consumer protection.
But the major beneficiaries of total repeal are the
largest financial entities. I understand why those who
believe absolutely in an unregulated market advocate a
return to the process that risks repeating 2008. I do
not understand how this stance complies with Trump’s
promise to vindicate the interests of average working
people against those who stand at the top of the
economic structure.
Former US
Representative Barney Frank is the author of "Frank".
The views
expressed in this article are the author's own and do
not necessarily reflect Information Clearing House
editorial policy.
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