World Economy

Trump Fiscal Policy Uncertain

US has been warned against unpicking bank rules.US has been warned against unpicking bank rules.

US Federal Reserve Vice Chair Stanley Fischer said there was significant uncertainty about US fiscal policy under the Trump administration, but the Fed would be strict in meeting targets of creating full employment and getting inflation to 2%.

Speaking at the Warwick Economics Summit on Saturday, Fischer said he thought Dodd-Frank financial regulation would not be repealed as a whole, and he hoped capital requirements for banks would not be significantly reduced, CNBC reported.

“There is quite significant uncertainty about what is actually going to happen, I do not think anyone quite knows. It is a process which involves both the administration and the Congress in deciding fiscal policy,” Fischer said, in response to a question.

“At the moment we are going strictly according to what we see as our responsibility according to the law, which is maintaining full employment and getting inflation to 2%.”

He also said he thought Dodd-Frank banking regulation legislation would not be repealed, though there may be some adjustments.

“I do not think Dodd-Frank as a whole is going to be repealed, but there may be some adjustments to it,” he said. “Significantly reducing capital requirements would reduce the safety of the system. I certainly hope it is not going to happen.”

Dodd-Frank financial regulation was passed in 2010 after the financial crisis of 2008-09, and included legislation requiring banks to maintain higher levels of capital.

 Need for Int’l Cooperation  

Some US financial institutions could be locked out of the European market if Donald Trump’s administration repeals global rules imposed in the wake of the financial crisis, a top EU official said on Friday, Reuters reported.

Valdis Dombrovskis, vice president of the European Commission and the EU’s financial services chief, said international rules agreed during the 2007-09 crisis must be upheld to avoid undermining financial stability.

“International finance needs international regulatory cooperation. Without it, we run the risk of regulatory arbitrage and renewed instability,” Dombrovskis said in a speech in London.

US President Donald Trump signed an executive order last week to review Dodd-Frank, a US law that implements a welter of international rules agreed by the US, the EU and other major economies during the global banking meltdown.

“We are sensitive to talk of unpicking financial legislation which applies carefully negotiated international standards and rules,” Dombrovskis said.

“Lax regulation in one country can create conditions for inadequate regulation and contagion throughout the world.”

Dombrovskis said the EU will uphold the reforms it introduced to toughen bank capital rules—based on the globally agreed norms—and will be “ready to take the necessary measures to protect and strengthen these achievements.”

The EU has allowed clearing houses, insurers and other financial firms from the US and other non-EU countries to operate in the bloc because it deemed their home rules to be “equivalent” or as strict as those in the EU.

But granting equivalence depends very much on the specific conditions of individual sectors and countries when the decision was made, he said.

“If these conditions change, we will have to reassess the situation,” Dombrovskis said.

 Recovery Unlikely 

It’s been 10 years now since the credit bubble began to unravel in US, and the country is still struggling to recover from the Great Recession that resulted from that collapse. John Silvia, chief economist at Wells Fargo Economics and the winner of MarketWatch’s Forecaster of the Month contest for January, says that “in important ways we’ll never really recover”.

The Great Recession permanently altered the economy of the United States, Silvia and his colleagues argue in a new research paper: “We are much poorer than we would be if the recession hadn’t happened. How much poorer? By one estimate, US real gross domestic product has been nearly 10% lower, on average, for each of the past nine years, which means that (by my calculations) we’ve lost about $13.6 trillion in output.”

Real disposable incomes are about $11 trillion lower over those nine years, amounting to a loss of more than $35,000 per person. That’s the equivalent of everyone in America getting laid off for 11 months.

“It also means we’ve lost tens of millions of jobs, and hundreds of billions of dollars of investment. It’s permanently altered the character of the labor market.”

 Three Generations Affected

“Three generations were affected, each in a different way,” Silvia said in a phone interview. The older generation took a huge hit to their wealth, which was mostly in housing, but also in their retirement portfolios. Many of these older workers have had to delay retirement.”

For those between 25 and 55, job loss has been the biggest challenge. “About a quarter of them will never make it up because they have a lower earning trajectory,” Silvia said. 

The permanent loss of income for the middle class and the lower middle class has led to a lot of “political frustration,” he said with a lot of understatement.

For millennials, the Great Recession has forced a re-evaluation of lives and their place in the economy. 

They know they’ll never have a real job unless they have a college credential, so millions are doing what it takes, including taking on massive debt, to get there. Most have downsized their expectations about consumption, Silvia said.

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