An election year in a democratic society is a hotbed of campaign rhetoric and promises, the bulk of which address improving the everyday life of the average citizen. Political candidates for public office make their case for election (or reelection) to potential voters on an array of social and economic issues. Perhaps one of the most divisive issues in the American political arena is Wall Street regulation.
Aside from being a physical location in New York City, the term "Wall Street" is synonymous with wealth, power and privilege. The address of 11 Wall Street is that of the largest equities market in the world, the New York Stock Exchange (NYSE). Accounting for upwards of US$19 trillion in market capitalisation, the NYSE acts as the unofficial mascot of New York's financial district. There are also financial institutions bearing household names such as Chase, Charles Schwab, Deutsche Bank and Mellon residing within a stone's throw. Staggering wealth and unfettered ambition are staples of the Wall Street culture, one that is much maligned and often the target of legislative debate.
Wall Street is perceived to be many different things by many different people. To some, Wall Street represents integrity, tradition and opportunity. To others, Wall Street signifies all that is wrong with mankind, serving as a barometer for shortcomings. To a candidate running for public office, merely uttering the phrase "Wall Street" in an off-putting tone may prove severely politically inexpedient.
Republicans, Democrats And Big Business
Over the course of its history, the United States has evolved into a predominantly two-party system: Republicans and Democrats. Although each party's platform has changed over time, unique perspectives regarding the relationship between government and big business are put forth to voters every two and four years. Both champion robust economic growth and low unemployment rates, but each party has differing opinions on how to achieve these objectives.
Often dubbed the party of big business, Republicans believe in creating a strong domestic economy through low corporate tax rates, reduced government spending and limited governmental intervention within the business sector as a whole.
As proponents of labor, Democrats see economic growth as a product of education, innovation and governmental capital investiture.
They may be perceived as vastly different, but the two parties do share several goals in regards to the politics of economics. Platitudes such as "level the playing field" and "fair play" resonate within each party's rhetoric. The notion of being tough on financial corruption and on companies that "cheat" the system is promoted by members of both parties. These principles are viewed as sacred, resonating deep within the psyche of the American voting public.
History Of Wall Street Regulation
Economic crises are often the battlefields by which political power is won or lost. Over the course of the last 100 years in the United States, there have been several landmark forms of legislation aimed at reining in Wall Street, each the result of an economic upheaval.
The Banking Act Of 1933: Glass-Steagall
The most famous negative economic stimulus in U.S. history occurred on October 29, 1929. "Black Tuesday" marked the first modern-era financial panic in the nation. Investors traded 16 million shares on the NYSE that day, wiping out billions of dollars in wealth. Far from a simple market correction, Black Tuesday eliminated a substantial portion of the generational wealth at the time. It also marked the beginning of the Great Depression.
Four years later, the Banking Act of 1933, known as the Glass-Steagall Act, was ratified by Congress. Championed as part of the "New Deal" proposed by Democratic president Franklin Delano Roosevelt (FDR), the act directly addressed the failure of nearly 5,000 U.S. banks during the Depression era. The key tenant of Glass-Steagall was the prohibition of commercial banks from engaging in investment enterprises. In addition, Glass-Steagall aimed to restore consumer confidence in the banking and investment industry through the following provisions:
- Tight regulation of national banks by the Federal Reserve
- Prohibited bank sales of securities
- Insured consumer deposits through the Federal Deposit Insurance Corporation (FDIC)
Financial Services Modernisation Act Of 1999: Gramm-Leach-Bliley
Glass-Steagall stood as active legislation until the passage of the Financial Services Modernisation Act of 1999, also known as Gramm-Leach-Bliley. Introduced to Congress by Sen. Phil Gramm (R-Texas), Rep. Jim Leach (R-Iowa) and Rep. Thomas Bliley (R-Virginia), Gramm-Leach-Bliley effectively rolled back the portions of Glass-Steagall that limited commercial banks from participating in the investment industry. Under the legislation, commercial banks were permitted to merge with insurance companies, investment banks and other providers of financial services.
The act gained bipartisan support in Congress and was signed into law by President Clinton on Nov. 12, 1999. Gramm-Leach-Bliley marked the reintroduction of commercial banking and its financial resources into the Wall Street landscape.
Wall Street Reform And Consumer Protection Act Of 2010: Dodd-Frank
The financial crisis of 2008 rattled the American economy to its core and provided fertile grounds for government intervention. Although debate over the ultimate cause of the crisis of 2008 carries on, the economic damage was undeniable. The loss of American household wealth credited to this period is estimated at US$21.4 trillion. The vast majority of the loss is attributed to a precipitous fall in home values (US$7 trillion lost), decline in equities (US$11 trillion lost) and a depreciation of retirement accounts (US$3.4 trillion lost). During this period, unemployment rose to a peak of 10.1%.
As a response to the financial crisis of 2008, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 passed Congress and was signed into law by President Barack Obama. Billed as "the largest Wall Street reform since the Great Depression," Dodd-Frank is credited to Sen. Chris Dodd (D-Connecticut) and Rep. Barney Frank (D-New York). A tremendously comprehensive piece of legislation, it promotes the divide between commercial banking and the investment industry.
The major government-stated goals of Dodd-Frank are as follows:
- Taxpayers will not bear the costs of Wall Street's irresponsibility
- Banking will be separated from "proprietary trading"
- End to the governmental bailouts of failing financial firms
- Protect American families from predatory lending practices
2016 Presidential Candidates' Position On Wall Street Regulation
Before becoming a reality, most forms of legislation are hotly debated in the House of Representatives, Senate, and Oval Office. In an election year, these debates are conducted within the electorate itself, taking into account the various perspectives of the citizens of the country.
The U.S. presidential election of 2016 has become one of the most ferociously contested elections in recent history. Billionaire real estate developer Donald Trump (R-New York) and former senator, secretary of state, and first lady Hillary Clinton (D-New York) have clashed over many different issues, including that of Wall Street regulation. Although many of the differences fall along party lines, much of the debate concerning Wall Street regulation centers on the 2010 passage of Dodd-Frank legislation.
Republican Presidential Nominee: Donald Trump
Trump's background is one of independent business enterprise. Hailing from the private sector, he amassed his fortune as a real estate developer in New York City in the 1980s. Later on in his career, he became an author and television personality.
Trump's views towards Wall Street regulation are largely reductive in nature. Citing governmental intervention within the private sector as being a deterrent to positive GDP growth, Trump supports various degrees of deregulation towards the financial industry.
However, Trump does provide flexibility to his statements regarding financial deregulation. Suggesting that although Wall Street banks are key players in the U.S. economy, they will not be treated as "too big to fail" and receive taxpayer sponsored bailouts under his administration.
One of the most definitive stances taken by Trump in regards to financial regulation is his open opposition to Dodd-Frank legislation. In a May 5, 2016 interview, Trump stated: "I think absolutely, Dodd-Frank has to be either eliminated or changed greatly." On a separate occasion, Trump is quoted as claiming: "Under Dodd-Frank, the bankers are petrified of the regulators; and the problem is that the banks aren't loaning money to the people who will create jobs."
In many ways, Trump's views on Dodd-Frank and Wall Street regulation are commonly shared within the Republican Party. Traditional Republican values such as low taxes and limited government can be observed in his public statements.
Trump's approach to regulation and economics as a whole is to support positive economic growth through establishing lower corporate and individual tax rates coupled with the availability of working capital for businesses. These are seen as contributing factors to positive economic performance, and byproducts of reduced governmental regulation.
Democratic Presidential Nominee: Hillary Clinton
Hillary Clinton's background is one of an extensive public sector tenure. A lawyer by trade, Clinton was the first lady of the U.S. from 1992-2000, served as a senator from 2001-2009, and was the U.S. secretary of state from 2009-2013.
Over the course of her career, Clinton has promoted strict regulation of Wall Street in addition to the expansion of government intervention in both the banking and investment industries. In a quote from May 2015, she stated: "We should be doing more to rein in risky behaviour on Wall Street and 'Too Big to Fail.'"
To provide details on how to rein in financial institutions, Clinton outlined plans for future legislation aimed at Wall Street in an op-ed piece for The New York Times dated December 7, 2015. In the piece, Clinton proposes that "risk fees" be charged to large investment banks, and "tough" independent regulators be appointed to the Securities and Exchange Commission (SEC) as well as to the Commodities Futures Trading Commission (CFTC). She also made the following statement regarding regulation in the op-ed: "I would ensure that the federal government has the authority and tools necessary to reorganise, downsize, and ultimately break up any financial institution that is too large and risky."
Clinton's views on Dodd-Frank are also part of the public record. She is a proponent of Dodd-Frank legislation and has stated that, as president, she would "veto any legislation that weakens financial reform" and fight for "tough new rules that go well beyond Dodd-Frank." These positions are very much congruent with long-standing Democratic Party principles.
Without a doubt, the general election of 2016 will be one of the most voraciously contested in modern history. It has regularly appeared to be a no-holds-barred confrontation between competing ideologies, neither inclined to give an inch. Any mention of common ground between the two candidates has fallen by the wayside, leaving the voter to discern various points of contention on their own.
However, when it comes to the practices undertaken by Wall Street participants, a few areas of agreement between the two candidates do exist:
- A financial entity being classified as "too big to fail" is to become a thing of the past
- No more taxpayer sponsored bailouts given to private financial institutions
- Government-provided incentives for employee profit-sharing programs are a positive activity
On November 8, 2016, Americans will go to the polls and cast their votes, thereby electing the next president of the United States. In many ways, the future course of the nation will be decided upon that day. Undoubtedly, the regulation of Wall Street and the behaviour of the financial industry as a whole will be a prominent concern of the electorate.
Any opinions, news, research, analyses, prices, other information, or links to third-party sites are provided as general market commentary and do not constitute investment advice. FXCM will not accept liability for any loss or damage including, without limitation, to any loss of profit which may arise directly or indirectly from use of or reliance on such information.
Senior Market Specialist
Russell Shor (MSTA, CFTe, MFTA) is a Senior Market Specialist at FXCM. He joined the firm in October 2017 and has an Honours Degree in Economics from the University of South Africa and holds the coveted Certified Financial Technician and Master of Financial Technical Analysis qualifications from the International Federation…