Business as usual?

One of the things I wrote on November 8 was that Trump was less beholden to Wall Street as most of the Wall Street supported his rival candidate. Well, his appointments convey a different message. This Bloomberg article details the Wall Street connections of his key appointees.

This piece from 2012 does not suggest any egregious bad behaviour on the part of Trump’s pick for Treasury secretary but equally nothing very thoughtful in terms of regulating finance. It is not a disaster to dismantle Dodd-Frank. But, equally, it is important which part of regulation to dismantle, which one to retain, for whom and what to replace it with. So far, such nuances are missing from the early pronouncements of his appointees nor are they evident (could be behind a paywall) from their careers.

It is funny that Goldman Sachs analysts covering sectors are now optimistic for all their sectors under Trump Presidency. Coincidence that many of his picks are Goldman Sachs alumni. I would not have expected that after his powerful last-minute/last mile advt. before the Presidential vote.

It is the considered view of this blogger that Finance deserves/needs to be regulated. It has some unique features that are problematic for systemic stability. Investor behaviour and that of many other participants in the financial system is pro-cyclical. Investors typically buy high and sell low. Ask Stanley Druckenmiller. Watch the first six and half minutes. Companies routinely buy stock back when prices are high and buy far too little when prices are low.

The (my) logic is that stock prices need artificial propping when they are high. Hence, companies do their bit. When they are low, corporate managements expect the market to do the buying. Quite why the management should be interested in the stock price in such a direct fashion has a lot to do with executive compensation that is tied to short-term stock price performance.

Further, competition in finance does precious little to mitigate systemic risk. If anything, it enhances systemic risk. Third, there is contagion effect. When one firm collapses in finance, other firms become more and not less unstable.

Well, these are the inherent instability features of finance that I have been telling my students about, in the last few months.

Hence, regulation is a must. At the least, capital requirements must be high enough for institutions – their owners and creditors – to bear the consequences of their failures without systemic impact. Then, there is product mis-selling and cheating, manipulating,  opacity, conflicts of interest, etc. Read this article on Credit Default Swaps and ISDA, for example.

It will now be up to Elizabeth Warren to quiz hard the nominee for the new Treasury Secretary on these aspects.

These are very early days but if the Presidency turned out to be one of cronyism for a different set of cronies (as opposed to the business cronies of the ‘Liberal -Left’ which were usually from the technology sector), the resultant swing to the Left-of-centre politics and economics in the American society in the next election would be  vicious, hard, decisive and likely durable for a long period. That would not be good for anyone.

Well, to be sure, one has to wait for specific policy initiatives before throwing in the towel.

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