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John Waelti: Getting rid of Dodd-Frank is the wrong answer
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He campaigned against American institutions, including the Congress, the media and Wall Street. One can't blame him for that. Although different from Trump's complaints, Democrats have plenty of complaints against those institutions as well.

Trump railed about how Wall Street was against average Americans and how terrible that Goldman Sachs awarded Mrs. Clinton hefty speaking fees. Totally neglected by Republicans and the media is the fact that Republicans frequently augment their incomes with speeches to the well-heeled. "But Hillary is owned by Wall Street," they bayed to the moon.

So now, instead of Wall Street as Trump's enemy, it's a love affair with a gaggle of high-level presidential appointees straight out of Goldman Sachs. Trump is whining that, because of regulations of the Dodd-Frank legislation, his friends can't get bank loans from those big banks. Of course it's not that maybe those loan applications are unsound and unworthy of loans. No, Trump insists it's the fault of regulatory overreach of Dodd-Frank - the law that was intended to prevent risky, unsound behavior, and excesses that were chief causes of the Great Recession.

With his customary hyperbole, Trump labels Dodd-Frank "a disaster" and he is going to "do a number on it."

We need not repeat here the virtues of capitalism. It's not a disparagement of capitalism, but in fact, to recognize that American economic history is replete with periodic booms and busts, characterized by unemployment and hardship, the worst of which was the decade-long Great Depression.

FDR's New Deal programs went far toward stabilizing American capitalism. These measures included introduction of Social Security, the Works Progress Administration, the Civilian Conservation Corps, legitimizing labor unions that gave voice to working people, and banking reforms including the Glass-Stegall Act, and the Federal Deposit Insurance Corporation (FDIC) that guaranteed safety of bank deposits. As useful as these programs were, it was the Keynesian economic stimulus of WWII government spending that brought prosperity to the nation.

The heart of the New Deal programs remained intact for several decades after WWII. That is, until Republicans began chipping away at them. Memories are short, especially during eras of prosperity. Big banks complained that they were at a competitive disadvantage and needed freedom to engage in more profitable activities. The Glass-Stegall Act that separated commercial banking and investment banking was repealed.

"Creative" financial instruments such as derivatives built on a house of cards, and excesses of banks and mortgage lenders led to the Great Recession of 2008-09. The failure of Lehman Brothers led to panic on Wall Street and throughout the financial community. The world financial system was becoming unraveled and faced real possibility of total collapse.

Policy choices, perhaps more often than not, are between the undesirable and the disastrous. It was undesirable and unpopular to bail out the big banks to prevent total collapse of the financial system. But it would have been disastrous to let bank failures spread to total collapse of the American and world financial system. That was a risk that neither the Bush nor the Obama administrations wished to take.

The objective of minimizing the possibility of repeating this near total collapse of the system led to the Dodd-Frank legislation. This legislation was intended to curb the ability of banks to take the kind of risks that led to the Great Recession and near collapse of the world financial system. Included in this comprehensive legislation is setting reserve requirements for banks of over $50 billion in capitalization. It installs the Volker Rule that prevents banks from trading securities for their own profits. It establishes the Consumer Financial Protection Bureau (CFPB) intended to protect consumers from abuses of financial institutions.

Trump and many Republicans don't like the CFPB, castigating it as "a rogue regulator that lacks oversight." Trump wants to get rid of the Volker Rule, thus permitting banks to return to potentially profitable, but risky, transactions. He hails JPMorgan Bank CEO, Jamie Diamond, as "nobody better to tell me about Dodd-Frank."

Does the Dodd-Frank Act need attention? Of course it does, but not with the intention of turning the big banks loose to do re-engage in transactions that would again put the economy at risk. There are undoubtedly changes that can be made to ease unnecessary burdens on medium sized and smaller community banks.

So here's the difficult regulatory balance that is needed. A primary objective is to avoid what has become known as "moral hazard." If banks "too big to fail" know that government will bail them out if they get into trouble, this can create incentives to engage in potentially profitable, but risky, behavior.

Banks need to have incentive to operate responsibly. Bank personnel and their stockholders should pay the price for malfeasance and incompetent management. What is needed are regulations that prevent risky behavior of big banks.

But it doesn't end there. The world is uncertain. Depending on unforeseen events, even a responsibly managed bank can fail. While the system can tolerate the failure of a single bank, it cannot tolerate panic that threatens the entire banking and financial system. The government (including the Fed, technically a quasi-public agency) must have legislation in place permitting it to stabilize the system in case of systemic failure.

This balancing act is not simple - regulation of big financial institutions to prevent behavior that puts the economy at risk, and insuring that banks and their stockholders rather than taxpayers take the hit for bad management, all while providing for government intervention in case of systemic failure threatening the entire financial system.

Responsible legislation will require mature adults to agree on these objectives, and put the stability of the financial system above short-run power politics.

Trump's loose talk of "it's a disaster," and repeal of Dodd-Frank is definitely not the answer.

- John Waelti of Monroe, a retired professor of economics, can be reached at His column appears Fridays in The Monroe Times.