If Donald Trump had campaigned for president by promising to make bankers richer, boost real-estate speculation and put Goldman Sachs in charge of the economy, would he have won?
Maybe not, yet these types of moves are among Trump’s first major actions as president. Trump, in fact, may be nation’s first ironist-in-chief, given that he ran a populist campaign focused on helping the “forgotten men and women of America,” but has greatly aided elites since winning last November. Eventually, Trump seems to think, the help will trickle down to the little guy.
But first, the ranks of the 1% are poised to reap a windfall. Trump just signed an executive order, for instance, that sets the stage for rolling back the 2010 Dodd-Frank banking rules passed in the wake the of the 2008 financial meltdown. There’s no obvious connection between the Dodd-Frank restrictions on banks, and a struggling middle class that’s hurting from lack of good-paying jobs. Banks freed from red tape won’t create those jobs. They won’t have new money to lend to other firms that will create those jobs. What they will have is bigger profits, which will flow largely to their shareholders.
On the day Trump signed that order, he said, “I have so many people, friends of mine, with nice businesses, they can’t borrow money, because the banks just won’t let them borrow because of the rules and regulations and Dodd-Frank.” He seems to be saying that banks would otherwise be helping profitable businesses grow and hire more people, except federal rules won’t let them.
But there’s no evidence of a lending shortage, regardless of what Trump’s friends think. Loans certainly were hard to get after the markets crashed in 2008, which was a normal pullback in risky activity by banks. But lending has bounced back strongly, as this chart on business lending shows:
There has been a push by regulators during the last year or so to rein in commercial property loans, which have been growing. Regulators worry that a bubble may be forming, as low interest rates inflate the value of properties and lenders lower standards to meet increased demand for capital by purchasers eager to cash in. Since Trump is a developer who knows other developers, he may be hearing his friends complaining about tighter lending standards regulators are forcing banks to apply to real-estate investors.
But preventing speculative bubbles from forming is what regulators are supposed to do. “Dodd-Frank gets blamed for more than it should,” says bank analyst Bert Ely. “This is the norm in terms of a long economic recovery and the economy reaching full employment. Regulators will start to send out signals that things are getting a little too heated. We’ve been through this in prior cycles.”
Trump’s executive order doesn’t actually repeal or amend the Dodd-Frank law. It will take Congress to do that through new legislation. But it does signal Trump’s support for killing some of those regulations, which pushed bank stocks up on the news. Bank stocks, in fact, have been the biggest beneficiaries of the Trump administration, by far. Goldman Sachs (GS) shares have have risen 34% since Election Day. Morgan Stanley (MS) is up 32%. The KBW index of bank stocks (BKX) is up 24%. And future gains could dwarf those: Research firm Fundstrat thinks financial shares could rise 90% during the next few years.
The Goldman Sachs influence
Speaking of Goldman Sachs, the Wall Street bank once vilified as a “vampire squid” seems likely to have as much influence over Trump’s economic policies as it has in any prior administration—a discordant development for a populist president. Trump’s strategic advisor, Steve Bannon, and his nominee for Treasury Secretary, Steve Mnuchin, are both Goldman alums. And Gary Cohn, Trump’s chief economic advisor, spent 26 years at Goldman, resigning as the firm’s No. 2 executive in January to join Trump at the White House.
Cohn is emerging as the lead architect of Trump’s economic policies, beginning with the rollback of banking regulations. Trump’s biggest economic undertaking will probably be tax reform, including lower rates on top earners and businesses. A nonpartisan analysis of the tax plan Trump put forward as a candidate found it would save the top 1% of earners about $215,000 per year, while a middle-income taxpayer would save about $1,000. It would also add more than $7 trillion to the national debt over a decade.
Trump is basically espousing supply-side economics—the idea that more favorable conditions for producers will generate more demand, and faster economic growth that benefits everybody. In theory, tax cuts and regulatory relief will lead to more spending, more growth and more jobs, even if the wealthy benefit more than Trump’s forgotten men and women.
But there’s considerable evidence it doesn’t quite work that way. The Bush tax cuts of 2001 and 2003, for example, were followed by deteriorating income inequality and the worst financial crisis since the 1930s. The most effective tax cuts are those that encourage work, saving and new types of economic activity, without ballooning the national debt. Tax cuts that simply put more money in the pockets of the wealthy just finance more yachts and vacation homes.
For now, Trump’s supporters don’t seem to mind his coziness with Wall Street bankers or his rich-first economic strategy. But the angry mood of voters suggests it probably won’t be good enough for prosperity to trickle down to ordinary folks slowly, over time. Trump needs more of a gusher, or some other marvel from the Goldman Sachs playbook.
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Rick Newman is the author of four books, including Rebounders: How Winners Pivot from Setback to Success. Follow him on Twitter: @rickjnewman.