Fighting the Last Battle...

Learning from past mistakes is generally a good thing. But sometimes efforts to avoid past fumbles can result in a failure to anticipate the next big thing.

The general consensus today is that excessive risk taking by large financial institutions led to the 2008-2009 financial collapse. The idea that losses at one institution can spread to others has also been recognized as a weakness of the system. A wide range of new regulations aimed at strengthening the global financial system have been enacted over the last several years to address these concerns. These include the Dodd-Frank Reform Act here in the U.S.

In general, these regulations have been successful. Capital levels, which serve as a buffer against losses, have been enhanced. Many riskier business lines, where banks use their own capital to trade things like bonds and derivatives, have been curtailed and compensation arrangements, which often rewarded employees for short-term risk taking, are being adjusted. But stiffer regulations and an ever-lower interest rate environment have made banking a much less profitable business. Over the last 10 years, banks globally have underperformed the rest of the market by approximately 50%.

Despite the progress made to date, calls for further financial market reform remain. Both Presidential candidates are interested in curtailing the Federal Reserve’s powers and further limiting the scope of bank business lines. It is important to note that much progress has already been made and that too much regulation can also have unintended consequences, such as reduced lending activity – a factor already in evidence.

The debate regarding immigration policy is also causing quite a “fighting the last battle” stir. The Trump campaign has taken a hard line on the issue, promising to build a wall with Mexico and deport unauthorized immigrants. The Clinton camp is, alternatively, focusing on reforms which provide an improved pathway to citizenship. The interesting thing, however, is the number of illegal immigrants entering the country from Mexico has actually been going down. In 2015, there were only 188,000 apprehensions of Mexicans at the U.S. border, down from 1.6 million in 2000. Several factors have contributed to this decline including the recession here in the U.S. and recent improvements in the Mexican economy. The five-fold increase in the number of border patrol agents between 1992 and 2010 has also been a strong contributing factor (see chart above).

While Mexico remains the largest single source of undocumented workers, the growth in illegals today is being driven by individuals coming from other parts of the world. India has been the biggest driver with unauthorized immigrants up 130,000 between 2009 and 2014 to a total of 500,000. Be careful of fighting the last battle!