By Vamsi Karedla
2017 has been a year of great speculation. Subjects such as migration and border security have received much limelight. However, this article attempts to bring to light one policy that has not caught the public eye – President Trump’s proposal to repeal the Dodd-Frank Regulations.
Rewind to 2009 and the US was reeling under a severe economic crisis. Ticker tapes read straight zeros, jobs were lost, revenues plummeted and the people generally lost faith in the economy. The great American dream was shattered.
Charm of mortgage-backed securities
Back in the 1980s, a shrewd broker from Salomon Brothers came up with mortgage-backed securities. He noticed that the American economy functioned on debts and many lenders and borrowers were looking for newer avenues to make money. So, he came up with a plan to use the loans that an everyday man would borrow as an avenue for investment, added some incentives to the same and then packaged them into attractive products for the consumer to buy.
The USP of the mortgage-backed security was and is very simple: If there is a loan that is under-performing and the lender wants to get rid of the same, he can sell it to another person at a lower price and the buyer would buy it expecting that it would perform at a better rate in the future. Around the time that Salomon Brothers began trading in mortgages, the per capita income of the average American began rising. A considerable section of the working class wanted to get rich and stocks seemed like the best way to get there.
Wolves of Wallstreet
This went on for a couple of years and a large number of firms went overboard by creating risky products. Real issues began cropping up when an individual stock trader began placing bets against his own clients’ bad investments. This was around the time that the investment banks began engaging in newer avenues.
Subsequently, these institutions became money-making machines and it was almost magical for the employees as the tangible work that they were doing was of far less value than the bonuses that they were pulling in. The banks became “too big to fail” but were potent enough to carry the entire economy downhill with them, in case they failed. Eventually, the problem that these banks posed caught the attention of economists and policy makers.
The Dodd-Frank regulations
In 2009, when the economy crashed, various economists identified certain core issues. Everyone agreed that the banks were given a free reign which they abused to disastrous levels. So, in 2009, when the crisis was ripping the country into pieces, the policy makers felt that it was time to curb these banking systems and the Dodd-Frank regulations came into existence.
By placing certain restrictions on the spending capabilities, asset holdings and the total amount of portfolio investment of the shares, the Dodd-Frank regulations sought to limit the asset-creating ability of the banks, in turn limiting the possible liabilities of the banks. These regulations were the government’s answer to the the market power of these financial leviathans.
The future remains uncertain
The new POTUS has taken the decision to do away with the regulations. This is likely to have a significant impact on the economy. The IMF for instance, has urged the government to not undo the framework put in place after the 2008 crash. It will be interesting to examine the impact of this move in the coming months.
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