Earlier this week, I was told not only that Donald Trump will win the election, but also that corporate capitalism will triumph so decisively over progressive socialism that large banks need worry no more about political risk. We’ve heard a lot about procyclical lending, but this forecast was the first bit of procyclical policy-risk analytics to come my way. Too bad there isn’t a counter-cyclical buffer against political risk – any company who thinks that post-2020 policy ushers in a new age of high-return regulated financial intermediation needs not only a very big buffer, but also a safety blanket to hug.
My counter-cyclical analysis has nothing to do with who wins the White House, although it makes a difference on individual issues unless spikes in financial or economic risks transform partisan differences into a whirlwind of anti-bank retribution. The challenges to traditional financial intermediation are coming fast and furious from populists, progressives, and the most centrist of all political establishments, central banks.
In a nation in which growth is as slow and wealth as unequally shared as the U.S., deep discontent is assured no matter who becomes President next year. Indeed, the vituperative nature of the campaign and looming macroeconomic and financial storm clouds suggest a sharp rise in political risk no matter the victor.
A simple fact of U.S. political life is that each end of the political spectrum wants to destroy the powerful financial institutions and most of the middle doesn’t trust the economic establishment enough to defend them. We’ve previously analyzed the alliance between progressives and populists seeking to weaponize U.S. financial policy, and the similarly tight bonds between conservative “anti-globalists” and socialist antitrust hawks. Each of these alliances has already redefined U.S. trade and technology policy. Both will take on still more fervent form if, as seems likely, the economy cycles down.
Add in a bit of financial market stress and it’s clear that populists and progressives will also unite on a renewed quest to make the largest U.S. banks smaller and more traditional. As we noted today, it’s worth remembering that the big-bank tax Elizabeth Warren proposed to pay for universal health care has also been espoused by a GOP Chairman of the House Ways & Means Committee.
To be sure, progressives very much want post office and public banks and populists very much distrust nationalized finance. However, it wouldn’t surprise me a bit if Donald Trump decided that he liked a U.S. Post Office bank if he thought it would undermine Amazon’s ambitions. The president is no traditional capitalist, as anyone watching his tweets should know. He dropped his 2016 campaign proposals to break up big banks and reinstate Glass-Steagall, but these and more will be back if it suits his political objectives or personal vendettas.
Central-bank digital currency is the one emerging policy threat on which Mr. Trump might meaningfully align himself with banks against both progressives and the Fed. Even so, his own Treasury Department is just fine with the FedNow system entry into faster payments. Mr. Trump might even support the expanded version of central-bank digital currency progressives espouse – Fed accounts – if he thinks it would get him the accommodative monetary policy he wants or – even more appealing to him – hands-on control of financial intermediation ahead of 2022 once the Fed is run by someone willing to do the White House’s bidding.
The procyclical policy philosopher’s sanguine forecast is premised on a set of recent federal rules relaxing bits and pieces of the Dodd-Frank framework and a let-up in aggressive, adversarial enforcement. However, it’s important to remember that all of these changes are very much at the margin – the bulwark of post-crisis rules remains largely as promulgated and more than a few big banks would strongly differ with any characterization of current enforcement policy as relaxed. A bit of Trump Administration regulatory recalibration provides no assurance – indeed, it’s irrelevant to – the risks of near-term structural realignment with far-reaching franchise-value risk, risk especially acute at any company who things the good times will always roll its way.