Congress is unlikely to pass new regulation on Wall Street and more likely to chip away at Obama’s regulatory state. President-elect Donald Trump campaigned to reduce regulations on the private sector. Republicans promised that if they held on to both chambers of Congress they would promote policies that streamline the regulatory state and promote private enterprise.
The most important actions the Trump Administration and Congressional Republicans can take this session is to repeal harmful laws and pass new ones that protect the free market from manipulation that destroys private enterprise.
One of President Barack Obama’s signature pieces of legislation was the Wall Street regulatory bonanza known as the Dodd-Frank Act. Senator Chris Dodd (D-CT) and Rep. Barney Frank (D-MA) passed this legislation in response to the financial crisis that hammered the economy at the end of President George W. Bush’s last year in office. The legislation was sold as an overhaul of the regulatory system that governed Wall Street and created a new regulatory beast called the Consumer Financial Protection Bureau (CFPB). While the goal was to prevent another Wall Street bubble, the law has done nothing but harass business, all while failing to slow the growth of the big banks to the slightest degree.
While the Republican-controlled Congress won’t realistically be able to repeal Dodd-Frank in its entirety, they will certainly be able to eliminate large chunks of it. Perhaps the most important provision to chop away is the Durbin Amendment, which was passed at the behest of Walgreens as a way to redistribute wealth from American consumers to giant retailers. By capping the interchange fee that credit card companies can charge retailers, the Durbin Amendment has saved $36 billion in swipe fee costs for big businesses like Walgreens, the chief lobbyist for the bill. Why? Because that $36 billion has instead been shifted onto consumers in the form of higher prices, the elimination of free checking, and the end of popular rewards programs. The Durbin Amendment, a classic example of the fallacy of price controls, represents the worst of Dodd-Frank and should top the list of Congress’ repeal priorities.
One regulation that should be passed by the new Congress is one that has bipartisan support and will protect the free market from hedge funds intent on destroying companies for profit is one that forces short sellers to disclose their short position. When a hedge fund or group of investors take a short position on a company, they are betting that the company goes broke and implodes. Many times, bad faith actors in the financial markets work to make good on their bets by distorting the free market through the use of the big government power.
Stopping this malpractice is a bipartisan idea that has been promoted by former Rep. Scott Garrett (R-NJ), who had written a letter dated September 29, 2016 to U.S. Securities and Exchange Commission (SEC) Chair Mary Jo White that argued “institutional investment managers are currently required to report their long positions” and “the Commission has received two rulemaking petitions calling on it to use existing authority to enact rules that would require investors to disclose short positions in a company.” Rep. Ted Lieu (D-CA) wrote a similar letter calling for the SEC to issue new rules to force transparency on short sellers. This is a bipartisan issue that may require legislation to protect the free market.
The case study that proves the necessity of this new regulation or law is the case of Pershing Square versus Herbalife. Bill Ackman, the founder and president of the giant hedge fund Pershing Square, has waged a war with his friends in the government to destroy Herbalife. Ackman had his special interests in Congress create a laughable, baseless investigation into the company in order to make its stock tank. Ackman did make his short position very public, yet we don’t know how many others followed his lead by hedging for the failure of Herbalife, a health food company that is one of the most successful health care product businesses in the whole world.
Herbalife has hung tough and survived, yet this whole transaction shows the need for some government protections from predator hedge fund managers intent on destroying functioning companies for profit. The destruction of American-based companies will not Make America Great Again, and hedge fund managers who take short positions and then try and use government power to destroy the companies they’re betting against are taking actions that fly in the face of the whole reason why the American people elected Donald Trump in the first place.
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