A U.S. administration headed by former Vice President Joe Biden is likely to take a different turn from the outgoing President Donald Trump administration when it comes to financial and economic matters. Trump was distinctly more pro-business and market friendly, reversing or rolling back many of the regulations and laws enacted by President Barack Obama. However, Biden is likely to do the same to many of Trump's policies and revert back to what they were before—if not go even further—pending Congressional approval as required.
Notably, the Dodd-Frank Wall Street Reform and Consumer Protection Act was passed and signed into law by Obama in 2010. The law included many restrictions on bank lending and other activities to avoid a replay of the 2008 financial crisis. Trump rolled back or lessened many of those restrictions. He also took a lighter touch when it came to consumer protection, a hallmark of Dodd-Frank, which created the Consumer Financial Protection Bureau (CFPB). Biden is likely to give the CFPB more teeth, similar to how it was under Obama.
Here are some of the areas where Biden and Trump differ and what investors can probably expect under a Biden administration.
Second Stimulus Package
A second fiscal stimulus package is generally supported by both parties although they disagree on the size and scope of it.
According to his website, Biden favours a second stimulus check for all Americans—the first one totaled $1,200 per person—although he doesn't specify the amount. He is also calling for an increase of $200 in monthly Social Security checks and a minimum of $10,000 per person in student loan forgiveness. He also wants emergency paid sick leave "to everyone who needs it, with no one left out."
One of Trump's proudest accomplishments was the Tax Cuts and Jobs Act of 2017. It reduced the corporate tax rate to 21% from 35% and raised the standard deduction, which reduced taxes for many individuals, among other changes.
Biden, by contrast, has promised to increase corporate taxes to 28% and to raise taxes on U.S. households making over $400,000 to a maximum 39.6% from 37% currently. However, if Republicans retain their majority in the Senate, he may not be able to pull that off.
Biden may have the opportunity to name as many as three new members to the Federal Reserve Board or as few as none, depending on whether the Senate remains in Republican hands as well as his own cabinet choices.
President Trump has nominated Judy Shelton and Christopher Waller to occupy two of those seats, but neither has been confirmed by the full Senate. While Waller is considered a shoe-in, Shelton has met some resistance, with two Republican senators publicly announcing that they would vote against her. That makes it risky to bring her nomination to a floor vote while they still have the majority. They could also wait until Georgia's two still-undecided Senate races are held in January, but that would be even more risky if either or both Republicans lose.
A third Fed seat would open up if Biden nominates current Fed governor Lael Brainard to be his Treasury Secretary, as has been widely rumored. Brainard is currently the only Democrat on the Fed.
If the Senate fills both vacant seats before Trump leaves office and Brainard stays at the Fed, Biden's next opportunity to fill a seat won't come until October 2021, when Randal K. Quarles's term as Vice Chair for Supervision ends. The terms for both Fed Chair Jerome Powell and Vice Chair Richard Clarida end in 2022. All three were nominated to the Fed by Trump.
While Dodd-Frank imposed many restrictions on bank activities and required them to hold more capital against bad debts, the Trump Administration rolled back some of those strictures. Notably, the major U.S. bank regulatory agencies agreed to relax the so-called Volcker Rule, which restricted the amount of proprietary trading banks could do and the amount of collateral they are required to hold against potential losses on swaps, freeing up billions of dollars. They also agreed to allow banks to invest more in venture capital funds.
By contrast, a Biden administration is likely to take a more skeptical view of banks. Sen. Elizabeth Warren, D-Mass., the architect of the CFPB and a critic of Wall Street and the banking industry, has also been mentioned as a possible Treasury Secretary. Ted Kaufman, Biden's former chief of staff when he was vice president under Obama, is leading the transition team. He once called for the breakup of the largest U.S. banks and has a "long history of seeking tough new rules on the financial services industry."
Biden has also surrounded himself with "a number of fierce advocates for Wall Street regulation" to his transition team, including Michael Barr, a senior Treasury official during the Obama administration who worked on Dodd-Frank, and Leandra English, the former CFPB director who was fired by Trump.
Biden is likely to replace Kathleen Kraninger as director of the Consumer Protection Agency. In June 2020, the Supreme Court ruled that the president has the power to replace the director without cause, and Biden will likely exert that authority early on. Kraninger was viewed as soft on lenders that prey on vulnerable consumers, while Biden will want a more aggressive person in that role.
Possible candidates to replace Kraninger include Richard Cordray, the CFPB's first director, who resigned in 2017 to pursue an unsuccessful run for governor of Ohio, and Rep. Katie Porter, D-Calif., a fierce bank critic and a former law school student of Warren.
The Trump White House and the incoming Biden Administration are at polar opposites when it comes to Fannie Mae and Freddie Mac, the government-controlled mortgage agencies that buy most of the mortgages made by banks and other lenders. The two agencies, which were once owned by stockholders under a government charter, failed during the 2008 crisis and were taken over by the government under a conservatorship.
The Trump administration wants to recapitalise the two agencies and return them to private ownership. Biden, however, wants them to remain under government control and be used as an instrument to execute administration housing policy, such as creating more affordable housing. Mark Calabria, the director of the Federal Housing Finance Agency, which regulates the two agencies, has been working to return them to private investors but may be stopped in his tracks by Biden, who may choose to replace Calabria.
Joe Biden, the presumed U.S. president-elect, is likely to be less business-friendly and more hostile to Wall Street and banks than President Trump. Biden has surrounded himself with many fellow liberal-leaning Democrats and endorsed many of their priorities in order to get their backing for his nomination. Biden, who was vice president under President Obama for eight years, is likely to revert back to many of the same policies under that administration, just as Trump rolled back many of those same policies, such as loosening restrictions on lenders and lowering taxes.
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…