“The system is significantly less volatile than it was going into the financial crisis and through it. The question is why? People are concerned that it might be because of the easy money policies that the Fed has pursued since the financial crisis and that that might distort financial markets and create artificial calm,” he said. “The levels of capital are double what they were then, so the amount of leverage is down significantly, so you have less risky business and the standing is on firmer foundations.”
In 2015, Taft called for a “realignment” of the financial system to serve the needs of society.
Has that happened?
“Since the financial crisis, you have had a wholesale redesigning of the regular structure of financial services – the pendulum probably swung too far,” he said. “Yes, the system is safer, sounder and more secure. In the wake of the financial crisis, we said we are just going to build as much protection as we can. Then the 2016 election signaled people want growth as a priority, so Congress and regulators walked back some of the excesses that might have been inhibiting growth.”
Revisions to Dodd-Frank, signed into law in 2010, have included a law that went into effect in May that eases financial regulations and reduces oversight for banks with assets under $250 million.
Taft says the financial industry supports the Securities and Exchange Commission’s newly proposed rule on fiduciary responsibility – Regulation Best Interest – to establish a standard of conduct for those recommending “securities transaction or investment strategy involving securities.”
On correcting what Taft called “unsustainable imbalances in fiscal and monetary policy,” he says “the Fed is trying to normalize interest rates and is taking baby steps toward reducing the Federal balance sheet.”
But restoring investor trust and confidence in financial markets remains elusive.
“Investors were deeply traumatized by 2008 and 2009,” he said. “Many of them got out and didn’t get back into the market. Since 2007, there has been a net outflow of investor money from US stocks; that proves that people are still wary.”
Eleanor O’Sullivan is an award-winning journalist who writes for Financial Advisor.