Opinion: structured finance poses threat to economic stability
The US financial system is under threat, and experts believe that the structured finance space is likely to be the cause of the next financial crisis
Over the course of the last month I have attended not one, but two events focused on the inevitability of the next financial crisis. The consensus, from a number of high profile panellists, was that it was likely to once again come in the structured finance space.
Bar the most sceptical, the 2008 crisis is generally attributed to over-lending in the mortgage market: customers with poor credit ratings were allowed large sums of money they had little hope of ever repaying. Today, it may not follow the exact same route – but things feel very similar. This begs the question: why are we allowing history to repeat itself?
According to the Fed, earlier this year, US consumer credit card debt surpassed the $1 trillion mark for the first time since the great recession. Household debt too has risen steadily, recently reaching $13.21 trillion. Yet, it is easier than ever to receive auto financing, apply for a bank loan and have several credit cards. The logic seems flawed, where are the lessons learned?
The largest banks are also subject to lighter rules than those that were installed in the years that followed the financial crisis. Some aspects of the Dodd-Frank reform, like the process of stress testing which gives regular checks on a bank's ability to fulfill its capital requirements, have been relaxed significantly in recent months and seem increasingly unlikely to demonstrate that a large banking institution is capable of avoiding irreparable failure.
The very body set up by Dodd-Frank to assist Americans with mortgages, loans and credit card debt, the Consumer Financial Protection Bureau (CFPB), appears to be imploding. Following the departure of former director Richard Cordray and his now failed attempt to appoint his own replacement, President Trump appointee Mick Mulvaney has overseen a systematic unpicking of the Bureau and its message. He has removed key members of three advisory boards with no intention of replacing them. Mulvaney has confirmed the Bureau will be re-examining previous changes to rules that reigned in pay day lenders. Mulvaney, also in charge of the budget at the Office of Management and Budget, sought no funding for the CFPB in January, and requested a 20% reduction this June. Currently, the CFPB receives its funding from the Fed but Mulvaney has asked Congress to pass legislation that will mean the agency is instead funded by congressional appropriations, giving lawmakers full oversight. This would allow him to effectively cut all funding and kill the bureau off for good.
To reiterate, why is this being allowed to happen? Why is the US adult population being offered credit lines at a reckless rate; in perfect tandem with the weakening of the rules and agencies designed to protect them from exploitation? The financial crisis ruined the livelihoods of many, but, as films like the Big Short demonstrated, not everybody lost.
One of the US's proud mantras is e pluribus unum - out of many, one. A more apt slogan as things stand would be more accurate: for the few, not the many. This can't be allowed to continue.