By Kim Jae-kyoung
U.S. President Donald Trump might have forgotten a lesson from the 2008 global financial crisis ― easy money causes a crisis.
Or he may seek to make more credit available to businesses to revive Wall Street and boost business activities by removing rules introduced to protect consumers following the 2008 financial crisis.
The speculation came as Trump signed an executive order Friday to roll back Wall Street regulations, including the Dodd-Frank Act, which his predecessor Barack Obama created following the financial crisis.
Now, attention is being paid to whether he is actually able to kill the Wall Street reform rules. The executive order is a declaration of intentions. Dodd-Frank is an act of Congress, and thus requires congressional action.
In its latest report, global credit ratings agency Fitch said that some of the initiatives proposed by the Trump administration may be put into action.
“The Dodd-Frank Act will not likely be fully repealed in the new Congress,” analysts David Weinfurter and Lee Joo-yung wrote.
“However, deregulation is broadly supported by the Republican majority in Congress and by the new administration, so some initiatives are probable.”
Many are trying to figure out how Trump’s move to deregulate financial markets will have an impact on the global financial market and industry.
Market observers say that once the move is put into action, it will have a far reaching impact on the entire financial industry because it will make U.S. financial players more competitive.
“Since financial markets are global and very competitive, it will impact most financial institutions. I assume other governments will make sure that their financial institutions are competitive with U.S. institutions,” said Sohn Sung-won, professor of economics at California State University.
“It will affect financial institutions with operations in the U.S.,” he added. “Most major Korean financial institutions have presence in the U.S. so they are affected by any change in Dodd-Frank.”
Dodd-Frank, which strengthened capital requirements for financial firms, was designed to oversee credit cards, mortgages and other financial products and to cut exposure to risky financial products.
In a meeting with small business owners on Monday, Trump said, “Dodd-Frank is a disaster……We’re going to be doing a big number on Dodd-Frank”.
Sohn pointed out that the law made it more difficult for businesses and individuals to get credit from financial institutions. “The easing of financial regulations will make more credit available to businesses and consumers,” he said.
Antonio Fatas, professor of economics at INSEAD, said that Trump’s move will make financial institutions more vulnerable to external shocks.
“This might not have any immediate effect on markets but in the medium term it will make the financial sector riskier and more vulnerable to shocks,” he said.
“It seems that we are already forgetting one of the few lessons we learned during the global financial crisis, that the financial sector is central to understanding macroeconomic risks.”
Trump’s move in favor of Wall Street should not come as a surprise because he stacked his economic team with billionaires and senior executives from U.S. investment banks ― three from Goldman Sachs.
Trump selected Steve Mnuchin, former Goldman executive, as the head of the Treasury Department. He also chose Gary Cohn, Goldman Sachs president and chief operating officer, as director of the National Economic Council.
Steve Bannon, chief executive of conservative media site Breitbart with a stint at Goldman Sachs, is now serving as chief strategist and senior counselor at the White House.
With his move to dismantle financial regulations, Trump is facing strong criticism from his political opponents.
“This guy is a fraud,” said former presidential candidate Sen. Bernie Sanders on Sunday on CNN’s “State of the Union.”
“This guy ran for president of the United States saying, ‘I, Donald Trump, I’m going to take on Wall Street.’ Then suddenly he appoints all these billionaires, his major financial adviser comes from Goldman Sachs, and now he’s going to dismantle legislation that protects consumers.”