White House Press Secretary Josh Earnest claimed Monday that regulations implemented since President Obama took office will likely stop the ongoing global financial turmoil from being as severe as the crisis of 2008.
Earnest said that rules mandated in 2010 by Dodd-Frank financial reform have the left the US more able to cope with market hiccups like the current global panic.
On Monday, investors around the world participated in an asset fire informed by increasingly vocal concerns about the underlying health of China’s economy. The stock market in Shanghai kicked things off by shedding 8.5 percent of its value. Key benchmarks in Germany, Spain, France and the UK followed suit by dropping between 4.67 and 5.7 percent of their values. By the time the trading day finally ended in the US, the Dow Jones Industrial Average, the S&P 500 and the Nasdaq indexes on Wall Street had fallen by 3.56 percent, 3.9 percent, and 3.8 percent.
While Earnest rejected the description of the US and Chinese economies of being “coupled,” he warned that Americans’ fortunes are, more than ever, dependent on developments abroad.
“There is no doubt that the global economy is more interconnected than it has ever been,” he said
Earnest, however, attempted to paint a picture of a US economy endowed with resilience by Obama’s stewardship. He listed figures about job growth, economic growth, and the unemployment rate, and encouraged reporters to “take a look at the impact of Wall Street reform legislation.”
“US banks have reduced their leverage and added $600 billion in capital since 2009,” he said. “Some of that is related to new requirements under Wall Street reform. Banks are less reliant on unstable short-term funding, and they’re better able to withstand short-term volatility in financial markets.”
Despite’s Earnest’s confidence, observers have questioned that actual impact of Dodd-Frank. About 35 percent of the 390 rules mandated by the legislation have not yet been finalized by federal regulators, and some major regulations that have been implemented under the law have been left with major loopholes.
On Wednesday, for example, Reuters investigative reporter Charles Levison demonstrated how “Too Big To Fail” banks–Goldman Sachs, JP Morgan Chase, Citigroup, Bank of America, and Morgan Stanley–have moved wide swaths of their trading operations offshore to skirt post-crisis rules on derivatives.
“Those affiliates remain largely outside the jurisdiction of US regulators, thanks to a loophole in swaps rules that banks successfully won from the Commodity Futures Trading Commission in 2013,” Levison noted.
“While many swaps trades are now booked abroad, some people in the markets believe the risk remains firmly on US shores,” he pointed out. “They say the big American banks are still on the hook for swaps they’re parking offshore with subsidiaries.”
Levison remarked that post-2008 reforms have curtailed the market for derivatives but said that it remains worth about $220 trillion “at face value” in the US alone. “And the top five banks account for 92 percent of that,” he said.
In April, Levison also reported how Wall Street lobbyists in 2013 successfully got the Securities and Exchange Commission to weaken Dodd-Frank disclosure requirements on asset-backed securities sold to institutional investors.
After the move, he said, the market for mortgage-backed securities became worth more than double what it was at the height of the housing bubble last decade, in 2006.
Both mortgage-backed securities and credit default swaps figured heavily in major financial industry failures in 2008, with the former playing a prominent role in the subprime mortgage meltdown and the latter at the heart of insurance giant AIG’s collapse.
Late last year, a report published by the Treasury Department’s Office of Financial Research described over-eager actors in wholesale credit markets as representing one of “several threats to the economy.” The paper concluded that overall risk to the economy was “moderate,” but said that weak underwriting standards and low interest rates have fueled “excessive risk-taking” throughout the past few years.
“Even an average rate of default could lead to outsized losses once interest rates normalize, given the expansion in corporate debt,” the report warned.
Last month, the Federal Reserve announced that it was not increasing the possibility it will soon raise key interest rates—a development that has widely been anticipated as the economic recovery has progressed. The Fed Board of Governors routinely notes that it keeps tabs on “readings on financial and international developments” when setting interest rates.
