In case you’re wondering whether it might happen again, check Bloomberg, and you’ll see that the default rate on bonds backed by car loans is getting close to critical levels. Currently, Dodd-Frank is there is protect against the damage, but Trump wants to remove that protection.
If you saw The Big Short, you know how this would play out, but in case you didn’t, here’s how it goes: a commercial bank gives a loan to someone at a really low rate because, to the bank, it’s an asset they can sell to a much larger investment bank who will purchase the loan for pennies on the dollar. The commercial banks will give these loans to anyone because they know they’ll get paid right away. However, when the default rate gets so high that even the large investment banks can’t cover their risk, they end up losing the money. So, they can’t invest in new businesses, companies backed by investment banks have to lay off workers, and this ripple effect keeps going. It doesn’t matter if it’s homes, cars, healthcare receivables, or anything else.
What does matter is that Donald Trump wants to minimize the protections you’d have if the banks screwed up one of their formulas and took too much risk and didn’t have any money left to cover their margins. Trump is in favor of letting banks do it again!
So let’s take this new bill called the Financial CHOICE Act one provision at a time as it rolls back Dodd-Frank and see the effects. It’s passed the House and is now waiting for a Senate vote, and then Trump would sign it.