As Trump Team Enters Office, Repealing Dodd-Frank Could Have Inflationary Risks

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Repealing Dodd-Frank could make the Republicans look like heroes for a little while, but the long-term impact could be much higher inflation, says David Merkel.

GoRion.com ran an article last month highlighting the challenges of repealing Dodd-Frank, the landmark legislation of the post-recession era. After sweeping to power in the November 8 presidential election, Donald Trump’s transition team ratcheted up the populist campaign rhetoric by repeating their promise to scrap Dodd-Frank. However, as experts note, any attempts to can the legislation could run into serious obstacles and have unintended consequences.

“Dodd-Frank has been good for the banks. It made them better capitalized, and better able to bear with genuine volatility in the economy. We won’t have to bail them out, and that’s a good thing,” David Merkel, an economist-turned-actuary who currently runs Aleph Investments, told GoRion.

“But repealing Dodd-Frank could also lead to higher inflation,” Merkel added. “If Republicans repeal the act, financial entities will have free capital, and will make a lot of loans as a result. The last time this happened was in the 1970s, which was the last period of serious inflation.”

Dismantling Dodd-Frank will make the banking sector less stable, but it won’t look that way in the short-run. Banks will have more money to make loans, and will stimulate economic growth as a result. In Merkel’s view, it’ll take time before volatility rears its ugly head.

“You don’t see a financial crisis until lending has crested, and even then the impact isn’t immediate,” Merkel adds.  

Senator Charles Schumer, the incoming Democratic minority leader, has already vowed to fend off any attempt to repeal Dodd-Frank. He has also vowed to put up an equally strong fight against scrapping of the Obamacare universal health plan. Others within the Democratic ranks, such as Ohio Senator Sherrod Brown and Jon Tester of Montana, have said they are willing to work with the Republicans on certain issues related to banking.[1]

Rather than scrapping the bill entirely, Trump’s team may find it more politically viable, and certainly easier, to amend it. The President-elect could opt to work with the Federal Reserve to improve the relationship between the government and financial institutions, and boost the sector’s long-term performance without repealing the bill. Trump will have the opportunity to influence the central by appointing four new people onto the Federal Reserve board.[2]

“If Dodd-Frank is repealed, Republicans might look like the heroes for a little while, and the Fed will look like the bad guys,” Merkel says, before adding that deregulation is likely coming under Trump. Just how far it goes is anyone’s guess.  

While the impact of deregulation on the housing market is less certain, higher lending costs will likely push mortgage applications down. The Federal Reserve appears to be on a firm path to higher interest rates, and this will certainly impact certain segments of the market, such as first-time buyers. Long-term mortgage rates rose for nine straight weeks to end 2016, and have only recently declined from more than two-year highs. Lenders are expected to remain well behaved even in the event of deregulation, since the market doesn’t have the same level of craziness with respect to the CDO market, sub-prime loans and non-bank lending activity.

[1] Jeff Cox (November 21, 2016). “Why it won’t be easy for Trump to repeal Dodd-Frank.” CNBC.

[2] Matthew Wisner (December 6, 2016). “Dick Bove: Trump Doesn’t Need to Repeal Dodd-Frank.” Fox Business.

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This article has been exclusively written for GoRion by...

Sam Bourgi

Sam Bourgi

Sam Bourgi has more than seven years of progressive experience in economic analysis, market research, public policy and the financial markets. He has a broad expertise in the financial markets, including commodities, real estate the foreign exchange. As a published author in both peer reviewed and industry research, Sam has covered topics ranging from mortgage-backed securities to consumer spending and labor. Sam's resume includes more than 40 government and industry publications, thousands of financial articles and hours of educational resources on personal finance and trading.

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