Expanded Basel Accord banking rules could devastate Trump’s economy

Since Congress passed President Donald Trump’s big, beautiful bill this summer, real GDP has seen strong growth Combined with minimal inflationAnd enhance American prosperity.

But there is one potential mistake that could end this decisive, action-oriented administration’s hope of making the American economy great again — while losing the midterm elections and Republican control of the government.

Trump’s team is strangely dead-set on what to do about the so-called “Basel Accords,” rules that were developed decades ago to introduce capital standards into the once-rapidly evolving international banking sphere — but have instead arguably led the global economy into recurring disaster.

This concerns the proposed expansion of Basel rules to include American community banks.

The Basel rules were established between the mid-1970s and the late 1980s, following the sudden failure in 1974 of two large but second-tier banks, one in the United States and one in Germany.

Experts at the time attributed both collapses to recklessness in the fast-growing but largely unregulated global financial trading markets.

In response, anxious bureaucrats did what bureaucrats do.

Over the next decade and a half, coordination took place through the Bank for International Settlements in Basel, Switzerland, central banks, and national regulators. . . to speak.

As they spoke, the markets saw no repeat of the panic of 1974.

Indeed, President Ronald Reagan’s deregulatory 1980s were so stable that economists now call those years the “Great Moderation.”

But finally, in 1989, 28 central banks and their partner regulators announced that they had agreed on a plan.

They seemed particularly proud that the plan included strong new rules requiring banks to hold 8% of the bank’s capital against their total outstanding loans.

Loans to larger companies (such as Apple, Intel, or Ford) meant setting aside additional percentages – a “risk weight,” as it was called.

Mortgages and loans to countries, whether unstable like Greece or giant like the United States, were considered riskless and did not require holding additional capital.

The mandate of equity capital reduced the profitability of lenders, and thus the setbacks forced banks to load their investment portfolios with loans in categories that did not require additional capital: mortgages and national debt.

What could go wrong? We soon found out.

Early rules were rolled out in phases: Basel I (launched from July 1988 to the end of 1992) and Basel II (April 2008 to December 2012).

In practice, increasing bank capital to 8% of outstanding loans has been achieved mostly by reducing the amount of outstanding loans – which, by definition, means reducing the country’s money supply.

Milton Friedman taught that it takes the American economy six to nine months to respond to movements in the quantity of money.

If we take into account that American banks were subjected to the new rules in stages, from the largest to the smallest, it is certain that Basel I was at least partially, and perhaps completely, responsible for the economic downturn that occurred in 1991, which cost President George H. W. Bush his re-election and sent Bill Clinton to the White House.

To be sure, with so much money going into the mortgage market, Basel I created a mortgage bubble.

A few years later, the introduction of Basel II led to another setback – and from 2007 to 2009, the painful crisis. That bubble popped.

The financial crisis and Great Recession followed, as did the election of Barack Obama.

Now, the same group of regulators has proposed extending the Basel rules.

This is known as the Basel III endgame, and the Trump administration appears to be paralyzed.

“Experts” assure us that the capital reserve rules imposed by the Basel Accord make banking systems safer. In theory they may be right.

But each new offering led to an economic contraction, as miscalculations about the incentives created by the rules exacerbated the problem.

The Trump administration is facing a crisis over the introduction of the endgame Basel III agreement, which would expand the scope of risk-weighting algorithms developed by global “experts” even further.

Its adoption means that city bankers who are sensitive to the details of local life and business will not independently decide what financing is available to small businesses and other local entities in the United States.

If financing America’s domestic businesses is to become great again, we must return to our long-standing respect for experienced practices.

In the wake of the 2008 financial crisis, Steve Hanke, an economist at Johns Hopkins University, wrote that the new rules could “shape… Structural A barrier to the supply side of the American economy.”

Trump should take note of this.

Does he really want to give global regulators the ability to pull the trigger on launching the next Basel Accord in the next few months – just in time to roil the economy before the midterm elections that will determine the future of his MAGA agenda?

The president and his companions Veteran Treasurer Scott Besent You need to make a decision – and act now.

Clark S. Judge, Special Assistant and Speechwriter to President Ronald Reagan, and President of the Pacific Research Institute.