POV: Trump’s Gutting Financial Regulation Misses Big Problem

Photo by Flickr contributor Sam Valadi

The 2008 financial debacle spawned federal legislation to protect the viability of the financial system. Among the causes of the crisis was dishonest behavior by some actors in the financial system and the enormous risks which intermediaries in the system took. Then came the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, which aimed at restoring reliability in the honesty of financial system services.

Regulation costs. It restricts freedom by prohibiting desired actions. Why impose regulation if it restricts freedom and increases costs? The answer is that freedom of action can cause harm; freedom to deceive hurts the deceived, and often, the whole system. If I entrust my savings to a broker or advisor I cannot trust, I will put my money under the mattress and undermine the benefits of a financial system.

“Un-regulating” financial services, as President Trump has hinted he’s considering, is not a full solution to the financial system’s woes. True, the current regulation does not prevent frauds such as Wells Fargo’s creation of phony customer accounts, but whether freedom and market discipline will do a better job is doubtful. Weakening or eliminating Dodd-Frank, and allowing complete free trading and churning of securities markets, will cement what is already too much of a casino culture on Wall Street. That investing culture needs to change, and law alone will not do the job, either. The financial servicers and their investors must change their culture.

Market discipline is based on competition. Uncontrolled competition could demolish the entire financial system, leading to a mistrust of the system similar to what happened after the 1929 stock crash. If competition and winning short-term are important aspects of the culture, what would dampen the zeal for winning immediately, and winning almost at all cost? Dodd-Frank has not contained the financial system as a betting casino. But the proposed changes in the act would limit reporting regulation and reduce the costs of the financial servicers, as well as reduce the encouragement and payment to “whistle-blowers.” That means less information about fraud by financial servicers and less caution to hide the fraud.

The changes would be good only if we admire those who are smart in cheating and avoiding the rules, and if we welcome the resultant anger and envy: how smart they were to gain at the expense of others.

As long as our culture supports this behavior, no law can effectively correct it. Therefore, the elimination of rules under the Dodd-Frank statute is not likely to change much. In fact, it would encourage a bit more fraud and speculation. We could expect the next financial disaster and the awakening of investors to the fact that their feeling rich was a dream rather than reality.

America’s financial system needs to change its culture. It should ban cost/benefit analysis and recognize the futility of trusting unbridled competition. A change of culture will occur less by the law and far more by leadership. Let leadership shame the abusers of trust in the financial markets. Let the investors be far more skeptical, trusting less and inquiring more. Give control over cheating to the potential victims rather than the law.

Tamar Frankel, a School of Law professor of law and Michaels Faculty Research Scholar, can be reached at Tfrankel@bu.edu.

“POV” is an opinion page that provides timely commentaries from students, faculty, and staff on a variety of issues: on-campus, local, state, national, or international. Anyone interested in submitting a piece, which should be about 700 words long, should contact Rich Barlow at barlowr@bu.edu. BU Today reserves the right to reject or edit submissions. The views expressed are solely those of the author and are not intended to represent the views of Boston University.