It’s hard to know what Americans must be thinking right now about the country’s economic future. About half (give or take the popular vote…), of Americans voted for President-Elect Trump, and I can only imagine that many must now be feeling like they’ve had the rug pulled out from under their feet. For starters, their soon-to-be-President promised them he would remove the corruption from Washington, yet his Cabinet appears to be stacked with billionaires. He also attacked Clinton rigorously for her conflict-of-interest connection to The Clinton Foundation during the campaign, but now we hear that he will remain a producer on his reality tv show The Apprentice. With this said, it is easy to see why the markets favour Trump, and why we’ve continued to see stocks rally (the S&P’s 500-stock index has risen 5.6% since the election).
From a business perspective, Trump is keen to cut taxes for corporations and looks to loosen financial regulations that were put into effect just after the 2008-09 financial crisis in an effort to curb future market manipulation and institutional leverage. Remember how the banks took on wayyyy too much risk but were deemed too big to fail so it would all be okay? But then they did anyway…
You could liken it to going to Nordstrom and maxing your credit card out with zero actual cash in reserve to pay any of it back, and then defaulting on your credit card. Except for that instead of your credit rating being shot, it was the American economy.
The regulation put in place, particularly the Dodd-Frank act which will likely be on the chopping block in some capacity come inauguration day, ensure that banks a) have a certain percentage of cash in reserve proportionate to how much is lent out or held in securities, b) are no longer able to take part in some of the riskier types of speculative trading seen pre-financial crash – this is called the Volcker Rule, and c) are regulated as to what kind of over-the-counter derivatives they can trade. Credit default swaps, a form of derivative, were the instruments that have been widely blamed for the financial crisis. What made them particularly dangerous was that they traded over-the-counter where trade information is not transparent and hence, market manipulation was rife.
It was only eight years ago that we saw the result of loosened financial regulations; a snowball effect over many years of epic and depressing proportions. But I digress. The point is, that while loosening regulations will inevitably and eventually have a negative effect (lax rules almost always breed bad behaviour, especially in banking), it certainly does allow for financial institutions to further pad their bottom lines and post bigger profits. This is why you’ve heard or read about US and global bank stocks hitting all-time highs since November 8th, and this is why big business is excited about President-Elect Trump.
Read the original article, Trump’s Honeymoon Begins: Confidence in the Economy is Booming by Patrick Cohen and Landon Thomas Jr, December 9, 2016 in The New York Times here.
Feature image via Vanity Fair’s Hive.
