There’s no doubt that many U.S. institutions have grown such long teeth over the years that they bit themselves in the foot. As a result, radical reform challenging conventional wisdom is long overdue. But, there are two ways to do this: the break-first/fix-later approach taken by the Trump Administration in biomedical research and other vital arenas; the other is to think first, then act decisively within the boundaries of current law or the better ones you demand. Radical reform to U.S. biomedical research is already leaving near-term treatments and cures on the cutting-room floor. If slash-and-burn transformation is also applied to financial-services supervision and regulation, systemic-risk guardrails could be unintentionally, but dangerously, dismantled.
The risks to biomedical research are not so much in what the Trump Administration has done, but that it’s more often than not done retroactively regardless of contractual commitments for continuing funding authorized under longstanding appropriations and by frenetic, indiscriminate firings of well-performing staff. You simply can’t suddenly stop a clinical trial without endangering patients and putting treatments years behind, if they continue at all. You also can’t stop basic biomedical research all of a sudden without leaving labs with a lot of mice, dogs, and primates to feed and no money for kibble. It also takes years to train good biomedical researchers; suddenly firing thousands of them endangers this pipeline and, with it, treatments and cures.
Biomedical research and financial-system governance have little in common, but leaving financial policy in tatters will also have unintended consequences with far-reaching collateral damage.
Case in point: the CFPB is among the agencies in most need of a radical makeover, but a disemboweled CFPB cannot issue the forward-looking consumer-protection standards essential not only to individual customers, but also to preventing a competitive race to the bottom with macroeconomic and systemic consequences.
If you doubt that, remember what happened to high-risk mortgage products left unregulated by prevailing “light-touch” thinking up to 2008. Although a lot caused the Great Financial Crisis, huge portfolios of high-risk loans magically transformed by complicit credit-rating agencies into AAA securities felled Fannie, Freddie, Lehman, and more than a few others. There never would have been so many high-risk, often-predatory loans if regulators had done their jobs.
This is not to say that the CFPB as it was was wonderful. Clients know well how FedFin’s analyses found grievous flaws and improper procedure in all too many of its sweeping actions. But, without a CFPB, banks have no federal consumer-compliance regulator and nonbanks have the wind at their back. Some of what they do will be truly innovative, but the absence of guardrails means some firms will surely blow up in spectacular crashes.
What about bank regulation and supervision? I’ve written before about the need for new capital rules far better than the August 2023 proposals. I’ve also written about grievous holes in bank supervision and resolution. But, simply firing a lot of supervisors will not make supervision better – that needs the kind of structural reform FRB Gov. Bowman recently outlined. Blocking new resolution standards means only that the FDIC will be still less capable of resolving a regional bank, let alone a GSIB or systemic nonbank. This could make the 2023 crisis look like a warm-up act.
And, what of bank mergers? The new OCC and FDIC merger policies made little sense, but going back to the 1995 standards makes even less. The agencies are sure to withdraw their standards; a block on replacements will do nothing to slow rapid industry consolidation into fewer and fewer gigantic banking organizations.
None of these financial-system risks will leave the human casualties certain to pile up quickly as biomedical research slows. Still, they matter – a lot – to shared prosperity and any chance of political stability. Slash-and-burn deregulation is a tempting gratification to those who see all prior rules as unfair impediments to lofty ambition. But slashing and burning maims and can easily create conflagrations. The cost of this kind of indiscriminate reform is too high.