If the United States economy is headed off a cliff, better that we receive no warning in advance. That may not be the stated goal of the Trump administration, but, to borrow a term from the late MIT economist Paul Samuelson, that’s its “revealed preference.” The preference in this case is revealed by Russell “Project 2025” Vought’s determined efforts, as director of the White House budget office, to shut down two agencies created by the 2010 Dodd-Frank Financial Reform and Consumer Protection Act.
Dodd-Frank was Congress’s attempt to head off another catastrophe like the 2008 financial crisis. It was the first major financial overhaul since the Great Depression, and despite commentators’ general feeling that it never went far enough, bankers hated it. Now those same bankers want President Trump to gut two significant parts of it, and he’s obliging—at the very moment that the economy is teetering like a spring breaker at Panama City Beach.
The first of the two offending agencies is the Treasury Department’s Office of Financial Research, or OFR. This is a small office—it’s never employed much more than 200 people—dedicated to furnishing policymakers with the kind of detailed information they lacked during the late aughts about mostly-unregulated “shadow banks” such as mortgage companies, private equity, private credit, hedge funds, and the repurchase agreement market, or “repo.” This last provides overnight short-term loans to manage corporate cashflow. The Washington Monthly has called OFR “The Most Important Agency You’ve Never Heard Of.” Here’s a detailed summary of OFR’s accomplishments.
Every year OFR sends an annual report to Congress that’s written in a typically cheerful tone that downplays financial risks. Still, the necessary information is there if you look for it. The latest report, covering the fiscal year that ended on September 30, noted that student loan defaults rose to 9 percent; that, at a time when private credit is stumbling, about 7 percent of the regulated banking system’s assets consist of loans to shadow banks; that hedge funds’ dependence on repo increased by 154 percent; and that growth in private repo (the Fed also has a repo operation) is off the charts.
One conclusion I draw from this report is that I need to think a lot more more about repo! It’s ballooned in recent years to $12 trillion, or more than one-third the size of the entire United States GDP. “If large lenders suddenly decide not to roll over repo,” the report says, “borrowers, many of which are securities dealers, must quickly find other sources of financing or sell assets, which may transmit repo market stress to other markets.” To quote Harry Dean Stanton in the eponymous 1984 film: “A repo man spends his life getting into tense situations.”
The financial world doesn’t appreciate seeing the federal government advertise its vulnerabilities, even sotto voce, and Republican Senator Ted Cruz of Texas, who between 2019 and 2024 collected nearly $2 million in campaign contributions from the securities and investment sector, introduced during that same time period three successive bills to abolish OFR, which he called “useless and unaccountable.” Last year’s “One Big Beautiful” reconciliation bill initially zeroed out OFR’s budget, but the Senate parliamentarian ruled against that. So Vought took matters into his own hands. Having already halved OFR’s staff from 196 employees to 100, Treasury officials informed staff last month that 64 percent of the remainder will be laid off, according to reports this week by Government Executive and the Federal News Network. This was proposed in President Donald Trump’s 2026 budget, but Vought must have figured: Why wait for Congress?
“As risks emerge in the financial system and cracks in the credit markets spread,” Senator Elizabeth Warren told Government Executive, “the Trump administration is gutting the office designed to evaluate financial risks in a giveaway to Wall Street. This is just the latest move by President Trump and his financial regulators to undermine financial stability and pave the way for another crash.”
The other Dodd-Frank agency Vought is trying to shut off is the better-known Consumer Financial Protection Bureau, or CFPB. CFPB’s function is not merely informational but regulatory; it polices abuse of consumers by financial institutions, which is epidemic. Already Vought has reduced CFPB to what E. Tammy Kim, writing last month in The New Yorker, called“The Zombie Regulator.” (The coinage is from Seth Frotman, its former general counsel.) CFPB’s headquarters, Kim reported, “is now mostly empty,” despite repeated court interventions barring Vought from conducting mass firings. Last year Vought tried to fire 90 percent of CFPB’s staff, but he was blocked last month by Judge Amy Berman Jackson of the D.C. District Court. Now Vought, who since firing CFPB director Rohit Chopra has been the agency’s acting director, proposes to cut what’s left of the staff in half, from about 1200 employees to 556 employees. The agency had 1750 workers at the start of Trump’s administration.
The CFPB’s primary purpose is to protect consumers, but when financial institutions get busy trying to lure retail customers in over their heads, that’s often a sign that the economy is headed for trouble. In 2008 mortgage companies, ravenous for home loans to package into securities, sold subprime mortgages to customers who quite obviously couldn’t afford them. The result was the worst recession since the Great Depression. At the moment the financial industries perhaps most desperate to find new customers are private equity and crypto. Rather than examine how they got into this fix and take steps to prevent it from happening again, the Trump administration moved this week to “democratize” finance by proposing that 401(k)s be opened to investment in private equity and cryptocurrecies. The only democratization here is that of risk. If the rule is finalized, private equity and crypto will promise unimaginably high returns to non-wealthy investors who can’t weather a sharp downturn. When they go down, as I observed last September, the whole economy will go down with them.
Mike Pierce, a former deputy assistant director at the CFPB who’s now executive director of the nonprofit Protect Borrowers, told me Thursday that he thinks the next financial crisis will stem from private credit, which is different from private equity but often practiced at the same firms. Private credit is in the middle right now of a sort of slow-motion bank run due partly to its exposure to software companies. With household debt right now at $18.8 trillion, or well over half of GDP, consumers are taking out “increasingly risky” loans, Pierce said, with companies “increasingly intertwined … with private credit.” He continued: “Whenever you see these boom and bust cycles, retail investors are always the last ones to get out before the bottom falls out.” To Pierce, the closest parallel isn’t the subprime crisis but the runup to the 2000 dot-com bust, when a Super Bowl ad played Pied Piper for Pets.com ten months before it went bust.
The administration doesn’t publicize efforts to shut down OFR and CFPB because these agencies serve the interests of non-elites. If MAGA voters knew about OFR and CFPB they might actually like them! Another reason to be silent is that you can’t sell these cuts as fiscally conservative. Closing these two agencies would have zero effect on the budget deficit because neither agency is funded by taxpayers; instead, OFR is funded by assessments on banks and CFPB is funded by the Fed (which in turn is funded by assessments on banks and by interest on securities). The only reason to shutter these agencies is because they get on the financial industry’s nerves.
“The president is very focused on keeping the pieces of his coalition that are still willing to return his phone calls inside the tent,” Pierce told me. “These people have a line directly into the senior staff of the White House. They ask for the world and more often than not they get it.” What they want in this instance is to shut off any warning lights that might dare blink red about the economy. It’s bad for business, and if a bust is coming they’d prefer we suckers don’t know in advance. We may get crushed but the big players will get bailed out, like always.
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