The authoritarian populism championed by US President Donald Trump is full of contradictions and affects virtually every nation and individual. He broadened his appeal to Wall Street by promising deregulation and simultaneously addressed ordinary people's anxieties about financial stability by promising tougher regulation to curb speculative practices of the financial sector. It is doubtful that he can deliver both.
An executive order to dismantle the 2010 Dodd-Frank legislation has been issued. The legislation was introduced after the 2007-08 banking crash to protect consumers and taxpayers by prohibiting banks from investing, owning or sponsoring private equity funds, hedge funds and proprietary trading operations for their own profit. It gave regulators the powers to break-up the 'too big to fail' banks. Through such deregulation Trump is endearing himself to Wall Street and is portraying himself as someone who will cut red tape.
Such deregulationist tendencies, however, do not sit comfortably with many who have been scarred by the 2007-08 banking crash which destroyed jobs and savings. Derivatives, famously described by veteran investor Warren Buffet as 'financial weapons of mass destruction', remain the biggest elephant in the room. Derivatives are essentially clever financial bets on the movement of interest rates and exchange rates, price of oil, commodities, crops, minerals and anything that can be bought and sold. If the financial horses win, banks are in the money and if they lose the banks end up holding worthless betting slips.
The 2007-08 crash has not dulled the appetite for financial gambles. At the time of the 2016 Presidential election, 25 major US banks had assets of $14.5 trillion and the face value of derivatives issued by them, which enmesh with banks in other countries, stood at $243 trillion. To put this in perspective, the US GDP is about $18 trillion and global GDP is hovering around $78 trillion. The exact risk-exposure of derivatives, as with all gambles, remains uncertain but banks claim to have hedging strategies for managing risks. This is a fool's paradise because all financial horses cannot win all of the time as Lehman Brothers, Bear Stearns, Morgan Stanley, AIG, Lloyds, Goldman Sachs and others discovered during the 2007-08 crash.
On the 2016 presidential campaign trail Senator Bernie Sanders seeking Democratic Party's nomination promised to check the casino mentality dominating banks by introducing a revised version of the US Banking Act of 1933, popularly known as the Glass-Steagall law. Donald Trump joined in too and promised to implement a "21st century" version of the Glass-Steagall law. The Glass-Steagall law was originally part of the tougher banking regulation introduced by President Franklin Delano Roosevelt after the 1929 crash. A major feature of the law was a statutory separation of commercial/retail banking which primarily took deposits and granted loans, and investment/speculative banking which indulged in sale of stocks and bonds often by using depositors' monies.
Of course, some were not happy about the law and spent over $300 million on lobbying and contributions to political parties to eventually engineer a partial repeal of Glass-Steagall by the Gramm-Leach-Bliley Act of 1999. They were supported by the then US President Bill Clinton. With the abolition of the separation between retail and speculative banking, many financial institutions returned to their reckless ways. Commercial banks and their executives made a dash for profits and higher performance related pay by buying and selling mortgage-backed securities, complex financial instruments and derivatives and paved the way for the 2007-08 crash.
Despite campaign commitments and a flurry of executive orders, the Trump administration has been silent on its promise to implement Glass-Steagall. May be his cabinet of billionaires has has talked him out of it. The task of imposing Glass-Steagall falls on Treasury Secretary Steven Mnuchin, a former partner of investment bank Goldman Sachs. No doubt, he would be working closely with former Goldman Sachs president Gary Cohn, now Trump's chief economic adviser. After a stint in government, both may well return to their former employers and it does not pay to bite the hand that feeds. Goldman Sachs with assets of $880 billion and derivatives of £45.5 trillion will not welcome any version of Glass-Steagall that generates vast profits. Neither will Citigroup with assets of $1.8 trillion and derivatives of £51.8 trillion, or JP Morgan with assets of $2.5 trillion and derivatives of $50.7 trillion. Trump's silence may appease some banks but no government will be in a position to foot the bill for the next banking carnage. The instability will once again destroy jobs, savings and pensions.
Trump's authoritarian populism must have resonated with a large proportion of the electorate as it offers something to those who feel ignored by main stream political parties. His electoral success offers food for thought to political strategists, especially those from the left as they seek to reconnect with the masses. At the same time, his subservience to big banks threatens stability of the financial system. Rather than waiting for history to repeat itself nation states should tame the banking industry by introducing their own version of Glass-Steagall.