A number of banks’ outlooks have predicted that next year will be a return to the boom times, driven primarily by large levels of infrastructure spending by Donald Trump’s administration and at least a glimmer of hope for regulatory easing.
Given Republican hostility to Dodd-Frank in Congress and the fact that parts of the cabinet have begun to resemble a Goldman Sachs board room, deregulation is more likely than ever in 2017. Banks have praised Trump and his cabinet as businessmen who are ready to end the stifling regime that has weighed on domestic growth (as well as their balance sheets).
But if Trump is going to get through his first term with his reputation as a populist president intact, he will need to dispel the growing cries of cronyism that have come with his cabinet appointments.
Take Treasury secretary nominee Steven Mnuchin, for example. His hint that Fannie and Freddie could be recapitalized and released would largely benefit hedge funds which took speculative positions on both GSEs when they went into conservatorship and share prices were at a record low.
These are led by a number of extremely wealthy individuals with some like John Paulson and Carl Icahn having personal links with Trump.
There are many good proposals for GSE reform and many decent alternatives to recap and release. The administration must be careful not to follow through on policy which could be seen as filling the coffers of some of the country’s wealthiest hedge funds to the detriment of US housing.
US financial institutions should also take a step back before rallying behind the cause of widespread regulatory easing.
Public opinion of the big banks since the crisis is still low, and if the country’s largest financial institutions use the Trump administration to roll back the clock to a pre-crisis regulatory environment, the long term casualty of any further economic turmoil will be the banks themselves.
Trump would do well to remember that he did not carry the popular vote in November and his message to his supporters was most definitely not one about making life easier for big banks.
In fact, the very opposite is true. Trump’s campaign regularly criticised Hillary Clinton for her relationship with Goldman Sachs in particular, so it is fair to say his win is not a mandate from the US public to ease banking reforms.
Also as punitive and sometimes inefficient as Dodd-Frank reforms have been, they have ultimately made banking safer.
Securitization, for example, is far less exciting and lucrative than it was during the crisis, but there are few who now operate in the market who wouldn't agree that it is structurally healthier than it was before 2008.
Any reversion to pre-crisis conditions, followed by financial institutions reaping huge rewards, will be unpalatable to the millions of Americans who are still suffering as a result of the Great Recession.
If America’s largest financial institutions and Trump’s cabinet are disciplined about reform and attempt to work with Democrats in Congress to come up with sensible changes to what is in practice a good idea, then it could easily be a positive for the US and promote healthy economic growth.
If however, financial institutions and the new administration use President-Elect Trump’s surprise November victory as a chance to return to the days of pre-crisis style profiteering, then the outrage which will follow when the US hits trouble again will make the post-crisis hostility to banking look positively pleasant in comparison.