Wed, Aug 30, 2017 - Page 9 News List

Searching for the ‘someone’ who wants to deregulate finance

By Howard Davies

Since a revolving door was installed at the entrance to the West Wing of the White House, it has been difficult to keep track of the comings and goings in the US’ corridors of power. Anything written about the personnel and policies of the administration of US President Donald Trump might be invalid before it is published.

At least for the time being, the key economic-policy actors remain in place.

Steve Mnuchin is still US secretary of the treasury and has not been mentioned in dispatches during the latest power struggles.

Gary Cohn continues to chair the US National Economic Council, although he is reported to be unhappy about some of the president’s statements on non-economic issues, and, of course, Janet Yellen is still at the helm at the US Federal Reserve, at least until February next year.

However, this stability does not seem to indicate a single settled view on economic and financial policy, particularly the future framework of financial regulation.

A remarkable recent interview in the Financial Times with Fed Vice Chairman Stanley Fischer laid bare some major disagreements.

Central bankers typically make a virtue of understatement and ambiguity.

Fed watchers need to analyze minute differences in wording and tone to identify shifts in thinking.

As former Fed chairman Alan Greenspan famously told a congressional committee: “If I turn out to be particularly clear, you have probably misunderstood what I said.”

So the language used on this occasion by Fischer, normally the mildest and most courteous of men, should cause people to sit up and take notice.

He argued that the US’ political system “may be taking us in a direction that is very dangerous.”

Referring to moves to roll back elements of the new regulatory order established in response to the debacles of 2008 to 2009, he said: “Everybody wants to go back to the status quo before the great financial crisis.”

He declared that “one cannot understand why grown intelligent people reach the conclusion that you should get rid of all the things you have put in place in the last 10 years.”

This is remarkable language, which merits deconstruction.

Fischer cannot possibly mean literally that “everybody” wants to return to the “status quo” ante.

The academic community is mainly in favor of even tighter regulation of banks, with higher capital requirements. With few exceptions, the media is even more hawkish.

Furthermore, I do not know a single bank chairman who thinks that going back to leverage ratios above 40, and tier 1 capital of 2 percent, would make any sense at all.

So who is “everybody” in this formulation?

The phrase reminds me of my mother’s frequent observation that “somebody,” unnamed, had not tidied his bedroom.

I was an only child.

However, here the suspect is not so obvious.

The only concrete proposals to emerge from the administration so far are in a thoughtful paper published in June by the Treasury.

It is true that the paper’s title: A Financial System that Creates Economic Opportunities, has a political flavor, but the specific ideas it floats are not exactly those found on the wilder shores where “free banking” advocates roam.

The authors of the paper — which was signed by Mnuchin himself — want to reform the complex, incoherent and overlapping patchwork of regulatory agencies left in place since the crisis.

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