Thursday, November 10, 2016

Some Financial Policies to Watch for with a Trump Presidency

Donald Trump’s electoral victory came in part because he appealed to Americans who feel left behind in the modern economy. These people seem to believe Trump will improve their financial prospects. With this in mind, I’ll be watching for policy changes that affect American taxpayers and retail investors. Two in particular are a fiduciary rule and bank leverage.

Fiduciary Rule

When brokers and other financial salespeople sell investments to the American public, mostly for their retirement accounts, they are allowed to sell grossly over-priced investments. The high fees can consume one-third to one-half of an investor’s savings over an investing lifetime (these fees are typically even higher in Canada). The Department of Labor has been moving toward a fiduciary rule, which means the salespeople would have to put their clients’ interests ahead of their own and choose lower-priced investments. We’ll see if this rule gets abandoned now that Trump has been elected.

Bank Leverage

If banks never borrowed money, their profit margins would be very slim. To make banks profitable, they borrow enormous sums of money. The amount they borrow is much more than the assets they hold. When the ratio is ten to one, profits and losses are magnified by a factor of ten. This ratio is often called the “capital-to-assets ratio.” When times are good, banks make good profits that enrich their owners and top management. If times are bad enough, such as during the 2008-2009 U.S. housing crash, banks can’t pay back their loans, and taxpayers bail them out. For bank management, it’s a case of “heads, I win”, and “tails, taxpayers lose.” This creates what is known as a moral hazard because banks have an incentive to take big risks. To combat this problem, U.S. laws such as Dodd-Frank and the Volcker rule are in place to limit leverage, which reduces the odds of banks being unable to pay their debts and protects taxpayers. However, these rules also limit bank profits and executive bonuses. It will be interesting to see what happens to these rules in a Trump presidency.

These are just two of the things that will test how serious Trump is about helping typical American people rather than helping the rich.

4 comments:

  1. Two ways he will make America Grate Again (I think that is the way it goes). His EPA guy believes that clear cut forestry should make a comeback too (I hear). Should be an entertaining 4 years (if you like watching Slasher Horror movies).

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    1. His EPA moves are concerning. I'm still waiting to see what Trump actually does. While he called many things "a disaster," he often didn't say what he intended to do.

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  2. He promised to make changed to the inheritance tax. As I understand it, Canadians with over 5 million USD will no longer have a problem investing in the US. He also promised to deal with the crazy taxation on US companies whereas Apple can't bring any money back to the US.

    This could be a positive for the little guy by stimulating investment.

    He is also promising to introduce a bunch of protectionist measures. Trade wars will increase prices and hurt the little guy most of all.

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    1. @BHCh: He said a lot of things, some of which seem crazy (like building a border wall with Mexico). So, I've decided to just wait and see what he actually does, instead of trying to guess.

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