- - Monday, February 27, 2017


Financial regulatory reform is coming. Donald Trump campaigned on a pro-growth regulatory reform message, promising to drain the swamp and dismantle the Dodd-Frank Act.

Since entering the Oval Office, the president has reiterated this pledge, stating that his administration would “be cutting a lot out of Dodd-Frank,” and issuing two executive orders to get the process going.

Now, House Financial Services Committee Chairman Jeb Hensarling, Texas Republican, is set to unveil a new version of his bill to replace large parts of Dodd-Frank. Still, it remains unclear exactly how this reform process will unfold.

Here are three actions that will help Congress and the president reduce cronyism and create a more equitable path to prosperity in the U.S.

1. Let the Export-Import Bank disappear. Shutting down the Export-Import Bank would end one of the most blatant corporate welfare programs in the U.S. Ex-Im provides subsidized financing to favored companies, turning so-called free trade agreements into pacts that actually hinder free trade.

During his campaign, Mr. Trump noted that he viewed the bank unfavorably because it was “feather bedding” that benefits just “politicians” and a “few companies” that could “do well without it.” He said that Ex-Im is “really not free enterprise.”

“Candidate Trump” was right. And implementing this reform is easy to accomplish; all Congress has to do is nothing; the bank is already slated to expire.

But if he wants to move things along, the president can announce that his administration does not want the bank’s charter extended. He can also pledge not to nominate new members to the bank’s board, and to veto legislation that reduces the quorum needed for the board to act.

2. Signal an end to government backing in housing finance. One of the glaring weaknesses of the Dodd-Frank Act is that it did virtually nothing to address a primary cause of the 2008 financial crisis: government backing of home mortgages.

At his confirmation hearing, Treasury Secretary Steve Mnuchin acknowledged this fact by saying that “the status quo is not acceptable.” The goal of reform should be to keep sufficient capital in the housing market, without keeping taxpayers at risk of having to bail out the market if it tanks again.

To get the reform ball rolling, the administration should write Congress a letter expressing its strong support for legislation that would ensure that no private entities in the U.S. housing finance system have either an explicit or implicit government guarantee of assistance.

3. Repeal the Volcker Rule. Section 619 of Dodd — Frank, commonly known as the Volcker Rule, represents perhaps the single largest wasted federal effort of the 21st century. Ostensibly, it prohibits federally insured banks from engaging in what’s known as proprietary trading — that is, making risky investments solely for their own profit.

It may sound logical to stop banks from taking “risky bets” with federally insured deposits, but that’s exactly the business they’re in. To stop banks from making risky bets with insured deposits, regulators would have to stop banks from (among other things) making commercial loans, buying or selling all kinds of bonds, using derivatives that reduce risk, making home mortgages, consumer loans, and even working capital loans to small businesses.

The fact that banking regulators limited all of these activities long before the 2008 financial crisis, along with the fact that Lehman Brothers, Bear Stearns, and American International Group were not insured depository institutions, underscores the sheer insanity of this effort.

The administration can do the economy a huge favor by announcing its support for repealing the Volcker Rule.

Taking these three steps would undoubtedly help “drain the swamp” of crony capitalism, so that more Americans can reap the economic benefits of free enterprise.

All Americans who want to get rid of bureaucratic red tape, government mandates, and sweetheart business deals that leave taxpayers stuck with paying off bad government loans and guarantees, should support these reforms.

Norbert J. Michel is a research fellow specializing in financial regulations for The Heritage Foundation’s Roe Institute for Economic Policy Studies.

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