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  February 3, 2017

Why Rolling Back Dodd-Frank Won't Benefit Small Businesses

Wall Street is sitting on billions - instead of giving loans to those who need it, the banks use it for speculation and CEO bonuses, says PERI co-director Gerald Epstein
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Gerald Epstein is codirector of the Political Economy Research Institute (PERI) and Professor of Economics. He received his Ph.D. in economics from Princeton University. He has published widely on a variety of progressive economic policy issues, especially in the areas of central banking and international finance, and is the editor or co-editor of six volumes.


SHARMINI PERIES: It's The Real News Network. I'm Sharmini Peries, coming to you from Baltimore.

President Donald Trump is expected to sign two new executive orders on rolling back financial industry regulations. He held a meeting early Friday with CEOs of major corporations, among them Mary Barra of General Motors, Indra Nooyi from PepsiCo and Jamie Dimon of JPMorgan Chase.

During the meeting, Trump announced his plan to roll back regulations. Let's have a look.

DONALD TRUMP: We have some of the bankers here. There's nobody better to tell me about Dodd-Frank than Jamie, so you’re going to tell me about it. But we expect to be cutting a lot out of Dodd-Frank because frankly, I have so many people, friends of mine that had nice businesses, they can't borrow money. They just can't get any money because the banks just won't let them borrow because with the rules and regulations and Dodd-Frank. So, we'll be talking about that, Jamie, in terms of the banking industry.

SHARMINI PERIES: On to talk about these new financial regulations and, of course, what Trump is rolling back is Gerry Epstein.

Gerry is the Co-Director of the Political Economy Research Institute. He's also Professor of Economics at the University of Massachusetts, Amherst. Welcome back, Gerry.

GERRY EPSTEIN: Thanks, Sharmini.

SHARMINI PERIES: So, in that clip you just saw, Gerry, Trump justifies rolling back Dodd-Frank regulations with the argument that many people and businesses who can't get loans because there are too many regulations in Dodd-Frank.

So, Gerry, given that Dodd-Frank has many short-comings, you and I have talked about that many times, but it did play a role in mitigating some of the excesses of Wall Street.

So, ignoring the short-comings, what do you think of what Trump just said? Is there any truth to that argument?

GERRY EPSTEIN: No, there's really no truth at all. There is truth that small businesses continue to have trouble getting credit. That's often a problem and it's been especially true since the great financial crisis of 2008. And it's often the case that households who need reasonably priced credit have trouble getting it. That also has often been a problem. But these aren't at all due to Dodd-Frank and those regulations.

The banks are awash in cash. They have lots and lots, billions and billions of cash available to them. And they've never really been in the business of lending to small businesses and to households that need it for reasonable purposes.

What they use that cash for is to engage in all kinds of speculation, pay big bonuses, and that's in fact, how they got us into the financial crisis to begin with.

So, what Trump said about getting rid of these regulations, helping small businesses -- it's not going to happen.

SHARMINI PERIES: Now one of the orders that he's expected to sign involves eliminating what is known as the Volcker Rule, which is a part of the Dodd-Frank Act and restricts banks from their ability to get involved in speculative investing. Explain that to us and what it means to withdraw the Volcker Rule.

GERRY EPSTEIN: Well, the Volcker Rule was initially created and designed to prevent banks from using their own resources to engage in highly speculative activities. And this was put in place because that's how a lot of these banks got in trouble in 2007, 2008 and demanded a bailout from the government.

So, they would take a lot of their own assets, they would borrow on it and leverage it up 30, 40, 50 times and then they would package collateralized debt obligations, risky mortgages to other toxic assets and sell them off. And then when they went south, they didn't have enough of their own resources to prevent themselves from going bankrupt. So, they demanded bailouts.

What the Volcker Rule was designed to do was to prevent them from using their own resources for these kinds of risky activities and make them subject to government bailout. The banks never liked the Volcker Rule. They, in fact, poked lots of holes in it. So, by the time it got implemented and so forth, it had a lot of holes in it but it was still intact as a principle. And they've never liked it and then now Trump says that he's going to get rid of it entirely.

This has been long on the wish list of Republicans and the banks. Trump ran on a platform of saying he's going to bring the banks to task. He's going to bring Wall Street under his thumb. But, of course, now what he's doing is giving them huge amounts of billions of dollars.

SHARMINI PERIES: Right. And the second order, Gerry, that he's expected to sign is to remove the restrictions on investment advisors from pushing investments that they can directly gain from personally. Explain how this happens on Wall Street and what signing such a rule might mean.

GERRY EPSTEIN: So, the way that the financial system works now, and especially the way the savings system works for households and small-business owners and workers, is that you're kind of on your own.

You have to save your own money through your 401K, through your own bank accounts and so forth. And a lot of people, of course, don't really know how to invest their own money and Wall Street makes it very complicated and complex to do it. And so, a lot of people hire these investment advisors or mutual-fund operators to choose investments for them.

There is absolutely no requirement, believe it or not, that these advisors are supposed to pick investments that are actually in the best interests of their clients. It's as if you went to a doctor or you went to a brain surgeon and the doctor or the brain surgeon recommended medical treatments for you that would just make them a lot of money and wouldn't in any way be required to do what's best for you. Well, that's the way the investment advisors are.

So finally, a rule was passed by the Department of Labor. This is fairly narrowly construed in fact, it doesn't apply to everybody, but saying that certain kinds of investment advisors have to give advice that's in the best interest of the clients. It's called fiduciary responsibility.

I mean, this is a no-brainer kind of rule and now Trump again, fulfilling the wishes of the investment community, wants to get rid of this rule.


GERRY EPSTEIN: It hasn't actually been implemented yet, but it's going to be. It’s supposed to be implemented in a few months.

SHARMINI PERIES: Right. And very interestingly he had Jamie Dimon at the table and he is taking advice from him. What do you make of that? Who is Jamie Dimon, for those who didn't follow the scandal surrounding him? And what can we expect from Jamie Dimon's advice to the president?

GERRY EPSTEIN: Yeah, well, it's Jamie Dimon, but it's lots of others. So, Jamie Dimon is the head of JPMorgan. They were up to their eyeballs in the global financial crisis: packaging collateralized debt obligations, selling them off to their clients without telling them, being on the verge of bankruptcy and demanding a bailout, even though they claimed that they didn't need a bailout.

Then claiming that they had complete control over their own balance sheets, their own books. And then you had the London Wells scandal where, without even knowing it, they lost billions of dollars in breaking the rules. In fact, doing proprietary trading on their London offices.

But it's not just Jamie Dimon. Look at his administration. Gary Cohn, former head of Goldman Sachs is now the head of his economic team. You look at Steve Mnuchin who also was Goldman Sachs, Treasury Secretary. You have his cabinet filled with these Wall Street people and Trump is going to deliver all of these massive goodies to Wall Street.

And, of course, it's not going to benefit Trump's supporters. It's not going to create jobs in Michigan or Ohio or Wisconsin or Florida or Pennsylvania. It's just going to gamble with everybody's money. It could lead to another financial crisis. And then taxpayers are going to be on the hook again, possibly to bail the banks out again.

So, this is a complete betrayal by Trump and his administration of a lot of people who voted for him.

SHARMINI PERIES: Right. Speaking of a lot of people who voted for him who would be protected under the Consumer Financial Protection Bureau might still be vulnerable in the coming days because apparently one of the targets of the Trump administration and the Republicans is to get rid of the Consumer Financial Protection Bureau.

The “Washington Post” quoted Cohn, that you just cited, as saying that the best way to tame it would be by firing its director. Can Trump actually do that to the consumers protected by this? Through some regulations?

GERRY EPSTEIN: No, he can't fire Richard Cordray who's the head of the Consumer Financial Protection Bureau without due cause. And presumably there's no due cause. His terms goes to July 2018. But, of course, Trump and his minions could make the Consumer Financial Protection Bureau's life very difficult. They could make Cordray's life very difficult and they presumably could think of ways to try to force him out. But they can't fire him. And one hopes that he'll stick it out and not give in to them.

SHARMINI PERIES: Right. And finally, Gerry, we have to have our antennas up in terms of how all of this is going to impact us, especially given what you're saying, which is that it could drive us back into a financial crisis of the kind we had in 2007, 2008 because we're rolling back all the regulations that were put in place to prevent that from happening.

What should we be looking out for next?

GERRY EPSTEIN: Well, there are some news reports that... one expects that the Trump administration is going to start putting enormous pressure on the Federal Reserve, which still is committed under Janet Yellen and others there, to try to maintain some regulations and supervision of the financial system. They don't want to be out there having to fight another financial crisis the way they were in 2007, 2008. They were asleep at the switch that time.

I think many of them in the Fed have learned their mistakes. We have a new Chair of the Fed, relative to that time, Janet Yellen.

But the Republicans and Trump and his banker friends, they know that the Federal Reserve is standing watch over the banks and they're going to do everything they can to try to undermine what the Federal Reserve is likely to be doing. Apparently, they're going to try to tell the Fed that they can't be involved in international forums like in Basel, Switzerland, to try to engage with other countries that try to regulate the banks.

So, there's going to be a huge fight over the Federal Reserve and it'll be interesting to watch that.

SHARMINI PERIES: All right, Gerry, I look forward to having you back when that unfolds. Thanks so much for joining us today.

GERRY EPSTEIN: Okay, thank you, Sharmini.

SHARMINI PERIES: And thank you for joining us on The Real News Network.




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