Wharton's Peter Conti-Brown discusses the future of financial regulation.

The Affordable Care Act arguably is not President Barack Obama’s only signature legislation. The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 — a comprehensive package of financial reform laws that was borne out of the Great Recession — also was signed into federal law during his time in office. Republicans have been trying to undo the act for years. But now that the GOP is in charge of Congress and the White House, the future of financial regulation is less clear. Peter Conti-Brown, Wharton professor of legal studies and business ethics, recently published a Penn Wharton Public Policy Initiative brief on this subject titled, “The Presidency, Congressional Republicans, and the Future of Financial Reform.” He spoke about where financial reform is heading under the Trump administration on the Knowledge at Wharton show on Wharton Business Radio on SiriusXM channel 111. (Listen to the podcast at the top of this page.)

Knowledge at Wharton: What do you think is going to happen with Dodd-Frank?

Peter Conti-Brown: Donald Trump and many other Republican candidates for president campaigned on the idea that the twin legislative evils of the Obama administration were the Affordable Care Act and Dodd-Frank, so the rhetoric around the campaign was to repeal them. In one of the presidential debates in 2012, Mitt Romney said the same thing, that Dodd-Frank was the biggest, wettest kiss to Wall Street he’d ever seen.

The enthusiasm, at least among the Republican base, would be behind repeal. Not so fast, I’d say. The piece that I published with Wharton’s Public Policy Initiative is to say that the politics around financial reform are complicated along two dimensions. Dimension No. 1 is around ideas. There are members of the Republican coalition for whom Dodd-Frank represents a kind of intellectual problem in the sense that they don’t like the idea of the bureaucracies that Dodd-Frank created. They don’t like the idea of regulators being in charge of dissolving the very large banks in case of distress. And they don’t like the idea of the Consumer Financial Protection Bureau.

For a lot of other Republicans, they just didn’t like the idea of being out of power. This isn’t a partisan jab at the Republicans; this is true of any political coalition. You have what we might call true believers and strategists. The true believers have identified one issue — be it abortion, financial reform, whatever — and said, “This is the way we want to change it.” The strategists say, “We don’t have an opinion about this particular policy issue. We just want to do what’s going to be politically most advantageous. We want to recapture power.”

I think it’s a little simpler in health care reform, but a very similar dynamic. You’ve got people who really hate Obamacare, but you’ve got Republicans in the House and Senate who are suddenly thinking, “Wait a second. Not so sure about this.” So, the path for passage of this Republican alternative to Obamacare is far from certain.

It’s more complicated in the financial reform area because the Trump coalition around financial reform is more diverse and includes voices that are incompatible with one another. The biggest challenge for the Republicans now is going to be looking anew at executive power, which they resisted during the Obama years. Now their guy is the one in office, so how is that going to change?

Knowledge at Wharton: The Republicans crafted the Financial CHOICE Act in response to Dodd-Frank, and it was ready to go assuming Hillary Clinton was going to win the presidency. That wasn’t the case.

Conti-Brown: Exactly. We’re told there is going to be a new version of the CHOICE act that reflects the reality of the Trump administration. But in September 2016, when the act was proposed, Republicans thought Hillary Clinton was going to win the election. This is the time when Paul Ryan was saying, “I’m not going to defend Donald Trump. I’m not going to campaign for him anymore. I’m just going to be about maintaining the House majority.” That was a world away from where we are now, and it’s a world away for financial reform. Now the challenge is going to be which of the critiques that the Republicans were making during the Obama administration were about ideas and which were about strategy? I really want to emphasize that this is not a question of Republican hypocrisy. It’s not a question of partisan nonsense. It’s a question of partisan politics. We’re already seeing some slippage along these lines.

“The biggest challenge for the Republicans now is going to be looking anew at executive power, which they resisted during the Obama years. Now their guy is the one in office, so how is that going to change?”

For example, the Republicans have hated the Consumer Financial Protection Bureau as long as there’s been a Consumer Financial Protection Bureau. They don’t like what it does, but they also don’t like how it’s structured. It’s a single director, as opposed to a bipartisan commission with three members from the president’s party and two from the minority party. The CHOICE Act seeks that change. They’ve already walked that back. They’ve already said, “You know what? We’re comfortable with the single director model.” What changed? Well, now their guy gets to choose who the single director is. A bipartisan commission panel makes the commission more accountable not to the political process, but to the parties themselves. That’s something that, when you’re in a minority party, you like. You like having an official voice in policy making. A Republican Party in the minority wanted it. The Republican Party, now in the majority [with] the president in the White House, is no longer interested. That’s the kind of dynamic I’m talking about.

Knowledge at Wharton: What is the future that you see for the CFPB?

Conti-Brown: I think it’s more certain than it seemed in the fall. The original CHOICE Act, the one that’s still pending that will be changed, basically abolishes the CFPB. It replaces it with what’s called a Consumer Financial Opportunity Commission. It’s got a dual mandate to protect consumers but also to ensure financial opportunity by keeping in mind the safety and soundness of banks, making sure all the regulations it passes are cost-beneficial to banks and consumers alike. It takes away a lot of the subpoena power. It makes it so that payday lenders are no longer going to be regulated in the same way. It changes everything about the CFPB. It would create a massive political football with no real orientation.

I think that a lot of those changes are still going to be a part of the new legislative proposal, but fewer. Part of this is the politics around consumer financial protection are not as easy as the politics around health care. If you have health care already and Obamacare changed it and you didn’t like the change, then you’re a constituency for its evolution. If you are someone who is ripped off by banks, you are not a constituency to see the agency in charge of policing bad bank activity changed. If you’re someone who’s not ripped off by banks, but you’re still a bank customer, you’re not an obvious constituency to see the regulator in charge of policing banks, you’re not a constituency for its repeal. The politics are going to be hard, and you can bet that Democrats will be delighted to have that debate.

Knowledge at Wharton: The need to have oversight of the banking industry is still a very necessary component to what we need to have in government.

Conti-Brown: I agree with you. A lot of Americans agree with you. Depending on how the question is pitched in these polls, the CFPB is broadly popular. A lot of Republicans in the coalition do not agree. The best version of their argument goes something like this: More regulation is crippling banks, so the regulation is unnecessary. Basically, they’re not saying that fraud should be allowed to be committed by these institutions. They’re saying that the regulations the CFPB is offering have nothing to do with fraud, so there’s a good evidence-based debate to be had. I’m more persuaded by the idea that the CFPB is up to good work, as opposed to bad work. But the CHOICE Act would essentially abolish it.

Knowledge at Wharton: You also talk in this article about the impact that we may have with the monitoring of the Federal Reserve.

Conti-Brown: This is another great example of presidential politics complicating what the Republican coalition will seek. For years during the Obama administration, Republicans were very clear. They thought that the Fed was too dovish, meaning they were too anchored on the idea of protecting the Fed’s unemployment mandate, as opposed to inflation. By keeping interest rates so low, by pursuing policies of quantitative easing, they were just building up inflationary pressures, and that was bad.

What they wanted to do is change the way the Fed does business by making them bound to a more hawkish rule that would cause interest rates to go up more, earlier. A version of that package was passed in September 2016, but think about what the implications are here. This is not just President Trump. It certainly applies to him, but any president wants to see a central bank accommodate his fiscal policy. In our history, we see so many examples in virtually every presidency of a president angling in that direction. The exception is Barack Obama. But he shouldn’t get high marks for this, because he didn’t have to. The Fed’s interest rates were low [during] his entire presidency.

“This is not a question of Republican hypocrisy. It’s not a question of partisan nonsense. It’s a question of partisan politics.”

Now, a Republican is president. Monetary policy-making being more hawkish is going to be antithetical to the president’s interests, so what will the president do? What will the Republicans do? Now that the president is one of their own, are they going to be more dovish? My bet as a historian, is, yes. They are going to abandon this effort because a Republican will not want to see the Federal Reserve pushed in a direction that’s going to be more uncomfortable for pursuing the kinds of fiscal policies that the Trump administration’s already announced.

Knowledge at Wharton: You bring up this idea of a policy audit that the Federal Reserve would be beholden to Congress.

Conti-Brown: This is a perennial issue. It goes back to the 1920s. For most of the Fed’s history, it was something Democrats pushed, not Republicans. Since the crisis, it’s been a Republican idea to audit the Fed. To be very clear, it’s not an accounting audit. The Fed is already audited by accountants. It is a political audit to provide more transparency, to ensure that the Fed is doing policy the way that Congress wants it to be done.

There are aspects of a Fed audit in the CHOICE Act around changing the way that the Fed does its policymaking. I’m broadly opposed to this in my book about Fed independence. I think that we do need more transparency and accountability but at the level of governance, making sure that we’re clear on exactly who is sitting in those big chairs, pulling those big levers of power. It’s not good to have the partisan political process injected deeply into the day-to-day of the central bank. That’s what the audit and its related proposals, including monetary policy by rule, does. It puts Congress, through the Government Accountability Office, into a backseat driver as the central bank.

The Fed has an army of researchers. Congress does not. They’re saying that we should even the playing field by putting the GAO in the position of giving Congress more ammunition to second-guess the Fed. Some people would say, “Well, what could possibly be wrong with more transparency?” In representative democracies, we recognize that not all of us have expertise on all issues. So, we’ve designed the government to delegate expertise to different agencies. Expertise is not pure. Ideology is going to affect every human who’s sitting in any one of these policy chairs. The question is striking the right balance between democratic accountability and letting experts do their jobs. You don’t want experts to run away with the whole thing. You need to have some sort of democratic, non-expert accountability. I think that the balance isn’t quite right at the Fed. I think there are too many unaccountable central bankers in charge of policy. But again, I would change the way that those central bankers are appointed. I wouldn’t put Congress in the position of second-guessing monetary policy decisions on a day-to-day basis.

Knowledge at Wharton: Historically, we have seen the congressional majority in step with the president when they are of the same party. We don’t necessarily have that right now.

Conti-Brown: That’s absolutely the case. There’s a myth in the United States that we have a two-party system. That myth goes something like this: Democrats or Republicans take turns between who gets to control the levers of power. There’s no room for third parties. The reason that’s a myth is because each party represents a very unruly coalition. At times, one party can impose better discipline than another. But that doesn’t change the fact that it’s still coalitional politics. Different wings of either party are going to want different things. Again, with health care, there is that diversity. But that doesn’t compare to the diversity of views within the Republican coalition on financial reform.

The election matters enormously, but not because Republicans are moving in a single direction. It matters because they’re going to have to have a debate within themselves, in Congress and with the president, just on the Republican side, about what their goals are. You can bet that the opposition party is going to try to exploit those differences for both intellectual and strategic gain.

“The politics around consumer financial protection are not as easy as the politics around health care.”

Knowledge at Wharton: Going back to Dodd-Frank, there’s already been talk about the idea that a full pull-out may not be the path to follow. There could be even some fighting on Dodd-Frank going forward.

Conti-Brown: Unquestionably. You’ve got to think about financial policy as being a three-legged stool. On the one hand, there’s legislation. That’s Dodd-Frank. And any repeal of Dodd-Frank would also be legislation. That’s cumbersome and unpredictable.

The second leg is in regulation. We’re already seeing some movement there. It’s much less cumbersome but can be time-consuming. That’s going to be about the regulators, like the Federal Reserve or the CFPB changing their rules. Some of those rules can change very quickly. Some of them have to take longer. But it’s much, much faster than legislation.

The third leg is supervision. That’s about the individual relationships that regulated firms have with their regulator through the supervisory arm. That’s a place where personnel is policy. President Trump’s been moving with very deliberate speed — very slowly — in staffing these agencies. There are a huge number of vacancies, including at the Fed, and they haven’t been filled. As they are filled, the policy of supervision will change on a dime.

But the Dodd-Frank process, we’re in for a long slog. Nothing’s going to happen quickly. I don’t think anything’s going to happen predictably. My speculation is that we’re not going to see significant financial reform in this congressional session. I think the risks are too high for blowing up in Republican’s faces the closer we get to the 2018 midterm. There are too many moving parts within the Republican coalition to make that move quickly.

Knowledge at Wharton: In terms of things on their plate, health care and tax reform are jumping ahead of the regulatory reform.

Conti-Brown: That’s exactly correct. Barack Obama is a very useful antecedent here. He was elected in 2008 with majorities in the Senate and House. In that congressional session, the two blockbusters were health care and financial reform. They had huge majorities, and it was still cumbersome. It was still time-consuming. The idea that we’re going to see tax reform, health care reform, immigration reform, infrastructure reform and financial reform in a single session with a presidency that is as scandal-prone as this one is, I think, fantasy. I think the closer we get to that election, the less likely you’re going to see Republican members of either the Senate or the House on board with an idea that will put such a big target on their backs from the Democrats.

“You’ve got to think about financial policy as being a three-legged stool.”

Knowledge at Wharton: What are the elements of Dodd-Frank that need to stay no matter what happens with the Trump administration?

Conti-Brown: That’s entirely a question of one’s political posture toward financial reform. My prediction of things that will stay is that we will still have a financial stability oversight council. We will still have some kind of financial protection bureau. We’ll have some kind of stress testing, which is the legislation overhaul to how bank supervision is conducted. After that, I’m not confident of anything.

Some of the other big changes are exactly what form any of those things will take. I think that their authorities will be curtailed. Whether the regulators will be in charge of dissolving and resolving very large failed banks is a very open question. That’s a Dodd-Frank innovation; it’s not clear that it’s going to survive. It might be turned over to the bankruptcy courts to handle, which is exactly what happened with Lehman Bros. Republicans recognize that Lehman was a disaster. They’d change the way the bankruptcy of large banks would occur, but it would essentially be based on the Lehman model, not on the new model created by Dodd-Frank.

One other thing that’s very important, that’s very likely to stay the same, is the overhaul of the way that derivatives are regulated, especially how they’re traded with centralized clearing and the like. I think that’s here to stay.