US President Donald Trump told the American public what he needed in order to get elected.
One minute he was howling about financial corruption, blaming crooked insiders for wrecking the US economy and destroying the wealth of the middle class.
The next minute he was attacking banking regulations imposed by the Obama administration. He swore that, if elected, he would free businesses from crushing regulations.
Some populist talk followed Trump into office. To date, most of his actions have focused on deregulation.
But, as Cycles, Trends and Forecasts editor Phil Anderson sees it, all this political rhetoric from Trump is part of an identifiable cycle.
Here’s how it works:
Stock and real estate markets in particular go up to unsustainable levels, just as they did into 2007. The fuel for this is some new form of credit creation.
The bubble then bursts, markets collapse, and the banks get into trouble. In turn, authorities see the need to rescue and bail out the banks in order to save the financial system.
Once the dust has settled, the government introduces new laws and regulations to stop a crisis from happening again. Problem solved. The markets stage a recovery, and people forget what happened.
After this, real estate prices bottom out and start to go back up. Stocks, meanwhile, enter a new bull market.
The banks then contact the lobbyists who get in touch with important members of Congress. Political powers trot out the same old lines, announcing that the existing rules are too restrictive. And that we need to get on with the business of making money and getting the economy working again.
The government steps up to the plate. The rules are re-examined; not surprisingly, they’re deemed too onerous.
After studying centuries of data, Phil says it’s happened to every generation in the US going back to 1800. This is when land was first sold by the US government to the public. Similar records go back to 1600 in the UK.
To Phil’s credit, he doesn’t give a vague ‘once in a generation’ call. He forecasts the year when the peak is likely to occur before a collapse, and when it is likely to be over.
How does he do it? By studying history going back centuries. And, while he notices that history doesn’t repeat exactly, it certainly rhymes.
After the stock market crash bottomed out in April 1932, the Banking Act of 1933 was made into law. This was commonly known as Glass-Steagall, named after Senator Carter Glass and Representative Henry B Steagall.
Provisions of the act banned commercial banks from trading in stocks and bonds. Investment banks were banned from taking deposits. Conservative banking was kept separate from ‘risky’ investment banking.
Affiliations and sharing employees was also banned. Banks that wanted to own stockbroking services weren’t allowed.
More importantly, a bank was not allowed to trade in the stock market. Proprietary trading, or using a bank’s capital to trade, was banned. Modern-day millionaire bank traders would be horrified.
As the stock market boomed into the 1960s, regulators allowed banks to take more liberties. You see, once there’s money to be made, restrictive regulations only stand in the way.
Glass-Steagall was finally repealed in 1999, with President Bill Clinton publicly declaring at the time: ‘The Glass-Steagall law is no longer appropriate.’
A decade and financial crisis later in June 2009, after the stock market low in March of that year, former US President Barack Obama proposed a sweeping overhaul of the US financial regulatory system.
Next to Obamacare, the former president’s greatest legacy was the most significant change to financial regulation since the Great Depression.
On 21 July 2010, Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act into federal law.
Commonly known as Dodd-Frank, the bill for the new act was introduced into the House of Representatives by Barney Frank and into the Senate Banking Committee by Chris Dodd.
The major components include new councils to study systemic risk and a comprehensive regulation of financial markets including derivatives. Dodd-Frank added in new consumer-protection standards, tools for financial crises, increasing international standards, and tighter regulation of credit rating agencies.
The entire act spanned 2,300 pages. For the banks, it was too much. And President Trump agrees.
The names of the US laws — Glass-Steagall and Dodd-Frank — shows us that it takes particular people to propose changes and make a difference.
President Trump vowed in January to do ‘a big number on Dodd-Frank’. And it’s easier when there are no opponents in the way.
Daniel Tarullo was nominated by Obama and took office in January 2009, just as Dodd-Frank was beginning to take shape. Opponents of banking regulations are thankful Tarullo resigned in February.
It also helps to pack your team with like-minded individuals. In July, Trump nominated Randal Quarles to take a key position at the Fed, picking him as the vice chairman of the board overseeing the banking system. Trump then got another acquaintance on board, adding Treasury secretary Steven Mnuchin, a former Goldman Sachs executive.
Not surprisingly, in June, Mnuchin announced a review of regulations stemming from Dodd-Frank. Naturally, the review calls for laws to be relaxed.
Bank traders will have looser restrictions. Regulators will be asked to reconsider onerous capital levels. And they will ease up on annual stress tests of a bank’s ability to withstand financial shocks.
And just as Phil predicts, the stock and real estate cycle sets itself up to run again…
Editor, Markets & Money