Trump vs Obama: Bank Policy

As we continue to compare the expectations of Trump against the final verdicts of Obama, banking is an issue that stands out starkly. Obama saw the country through the worst banking crises of several generations, and he used the situation to justify hefty reform.

While it’s unfair to blame him for the crisis in the first place, there are plenty of points to contend in how he handled the situation as a whole. Let’s look at this important issue, on which Trump and Obama differ to extremes.

The 2008 Crash

Before diving into the major differences in bank policy, it’s worth taking a brief moment to review the 2008 crash. While you likely remember that the crash was tied to banking and there was a major bailout, it’s easy to forget the finer points.

To oversimplify, banks ran into a huge financial problem because too many borrowers defaulted on loans in too short a time. The fact that these loans were for housing (the largest loans of all for most Americans) exacerbated the problem by the sheer total of dollars that defaulted.

Ultimately, it was a dramatic increase in subprime lending that led to this result. Tracing the true origin of the problem, though, brings us back to policy.

While bankers were certainly responsible for their share of the problem (any expert in their field should have been able to anticipate heavy defaults), the original source came from the Clinton administration. They pushed legislature that made it more difficult for banks to refuse mortgage loans.

When banks were forced to take on these less favorable borrowers, they were able to turn profits fast. They latched onto the mentality and pushed the subprime lending too far. So, you have policy shaping action, and that action snowballed into a major financial crises. Let’s modernize our discussion.

Obama Policy

You’ve read several criticisms here about how Obama has used antiquated financial policy, and the results are the stagnant economy that has plagued the U.S. for the last few years. The major points or Obama’s take on everything are that he first bailed out the banks. He then slapped a slew of regulation and oversight that was intended to keep banks from excessive lending to subprime candidates.

On paper, this strategy has appeared successful because we haven’t seen an additional epidemic of loan defaults. In reality, it has done little to stifle subprime lending, and it has crippled general cash flow for banking across the board.

You may remember previous discussions on auto and college loans. In them you learned that subprime lending is more rampant than ever. Banks are getting around regulation by keeping the riskier loans at smaller totals. As expensive as college feels, it still pales in comparison to the average house. The end result is that banks are forced to spend too much money on regulations that aren’t seeing the results that were intended.

The Trump Plan

Enter Donald Trump. Before we jump down this rabbit hole, keep this disclaimer in mind: it is too early to say exactly how Trump’s policy will manifest. It still has to get through Congress, so the details have to be considered as fluid.

The major point of the plan, though, is to reduce the cost of regulation for small and mid-sized banks. It’s important to note that the goal is not to eliminate the regulation. Trump simply wants to minimize how much banks are being charged for their own oversight.

It’s also important to notice that Trump is offering no changes at all for Fortune 500 banks. When he talks about removing regulation, it specifically targets small-scale regulations that do little to impact rates of defaults. Which regulations might fully be chopped is still speculative.

So, if Trump’s plan doesn’t really change the rules on lending, why does it matter?

Banks, small and large, are losing liquid funds to these regulations. Removing some of them frees small amounts of assets for any one bank, but across the company it generates billions of dollars that can be safely loaned.

Increasing capital through improved efficiency is far and away the safest and best way to stimulate the economy. This is consistent with all of Trump’s economic policies, from trade deficits to repatriating cash.

Regards,

Ethan Warrick
Editor
Wealth Authority


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