For candidate Donald Trump, one surefire way to ignite his political base in 2016 was to savage Wall Street for stealing the American Dream from the working middle class and to accuse Hillary Clinton of rigging the system for friends at Goldman Sachs and other Wall Street banks.
“She is their puppet and they pull the strings,” Trump told the cheering Republican National Convention last July.
Now, this self-proclaimed populist “voice” of the people has flip-flopped and forged an alliance with Wall Street’s leading bankers.
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In the first month of his presidency, Trump has restored “Government Sachs” by bringing former Goldman Sachs bank executives into the corridors of power, and he has signed an order to start dismantling Dodd-Frank, the financial regulatory law passed by Congress in 2010 to keep Wall Street’s “superbanks” from taking the nation over the financial cliff again, as in 2008.
Two weeks ago, at a clubby luncheon for Wall Street and corporate CEOs in the state dining room of the White House, Trump warmly embraced top bankers and promised Wall Street deregulation.
In that audience of trickle-down capitalists, President Trump turned ostentatiously to Jamie Dimon, CEO of JPMorgan Chase, whose bank has paid more than $28 billion in fines and settlements in recent years for toxic securities abuses, money laundering, violations of investor and consumer protections, relying on robo-signers to foreclose on mortgages and mishandling loan modifications. “There’s nobody better to tell me about Dodd-Frank than Jamie,” Trump said.
“We expect to be cutting a lot out of Dodd-Frank because frankly, I have so many people, friends of mine that have nice businesses, they can’t borrow money,” Trump went on. “They just can’t get any money because the banks just won’t let them borrow it because of the rules and regulations in Dodd-Frank.”
Not only was that at odds with bank lending at record levels, but it was a far cry from what candidate Trump told voters in Ottumwa, Iowa, in January 2016. “I know Wall Street. I know the people on Wall Street,” Trump declared. “I’m not going to let Wall Street get away with murder. Wall Street has caused tremendous problems for us. … I don’t care about the Wall Street guys. ... I’m not taking any of their money.”
But in fact, Trump’s campaign did take money from Wall Street’s super rich and rewarded several with Cabinet plums. He chose three of the “system-rigging, string-pulling” Goldman Sachs veterans for his inner circle – Steven Mnuchin as treasury secretary, Gary Cohn as director of his National Economic Council, and Steve Bannon as his chief strategist and White House Rasputin.
So far, neither the president nor his team have spelled out the specifics. His executive order was vague. Cohn, Trump’s chief economic strategist, said simply: “The first thing we are going to attack is regulation, over-regulation. … We have to get the United States banking system working again.” As president of Goldman Sachs, Cohn indicated that among his pet peeves were the increased requirements for capital reserves to cushion against a financial crisis. They were hurting bank growth and profits, Cohn said.
Dissent came from Federal Reserve Chairman Janet Yellen in testimony before Congress on Tuesday. Yellen asserted that while some modification of the Dodd-Frank regulations might be warranted, she saw “no evidence” that regulations had hurt bank profits or growth.
Clearly, Wall Street believes deregulation will generate higher profits, but as Yellen was suggesting, the path Trump & Co. are pursuing is risky for the country.
Recent history teaches the high price of trusting the free market to regulate itself. The financial collapse in 2008 followed deregulation of high flying financial derivatives and the abolition of the Glass-Steagall legal barrier between the commercial banks that most of us use and the investment banks that trade speculatively in the Wall Street casino.
An early warning about the perils of the multitrillion-dollar market in derivatives, which legendary investor Warren Buffett once called “financial weapons of mass destruction,” came from Brooksley Born, the tough-minded chair of the Commodity Futures Trading Commission.
In 1998, Born sounded the alarm that the derivatives market was out of control and likely to take down some Wall Street investment banks or hedge funds. For safety’s sake, Born proposed new regulations to standardize the derivatives market and make it more transparent.
But Born was squelched by Treasury Secretary Bob Rubin, a former Goldman Sachs CEO, and former Federal Reserve Chairman Alan Greenspan, also a longtime Wall Streeter. They not only tried to stifle Born’s warnings but got Congress to pass a bill preventing Born’s commission from regulating derivatives.
Born was quickly vindicated when Long Term Capital Management, a huge hedge fund deeply invested in derivatives, went under. But instead of learning from Born’s prescience, Rubin and Greenspan eased restraints, trusting Wall Street superbanks to protect themselves from disaster. For Greenspan, then seen as a financial oracle, freeing the market was an article of faith.
After two Wall Street banks collapsed and the financial markets nose-dived in 2008, Greenspan confessed to “flaws” in his free-market economic model. “Those of us who have looked to the self-interest of lending institutions to protect shareholders’ equity, myself included, are in a state of shocked disbelief,” he admitted to Congress. “The whole intellectual edifice collapsed.”
In response, the Obama administration teamed with Sen. Chris Dodd, D-Conn., and Rep. Barney Frank, D-Mass., to win congressional adoption of Dodd-Frank, which imposed new safeguards – regulation of derivatives; a ceiling on proprietary trading by major banks; a Consumer Financial Protection Bureau to shield consumers against predatory lenders; new federal authority to help a failing bank to wind down its operations without sinking the whole system; more oversight and higher reserve requirements.
Even so, Wall Street banks watered down many provisions, and now they want to gut Dodd-Frank. A big mistake, assert some experienced financial experts. To protect the economy, they advocate tightening the Dodd-Frank regime.
Among them, Sheila Bair, former chair of the Federal Deposit Insurance Corp., warns Trump of the perils of deregulation. “I hope,” says Bair, “he will pursue a policy of smart regulation not no regulation, because no regulation was what got us into trouble in 2008.”
Hedrick Smith is former Washington bureau chief of The New York Times, author of “Who Stole the American Dream?” and executive editor of reclaimtheamericandream.org. He can be contacted at firstname.lastname@example.org.